01 Apr 2002
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Urban Evolution - HBS Research on the Inner City


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After decades of decline, despair, and neglect, the last ten years have brought some preliminary signs of revitalization to a number of inner-city neighborhoods in the United States. Blighted areas such as Chicago's North Side, New York's South Bronx, South Central Los Angeles, and Houston's Fifth Ward - once synonymous with out-of-control crime rates, gang warfare, antiquated public housing, crumbling schools, and degrading poverty - have begun to show indications that there may be a way out of the hopeless downward spiral.

In their 2000 book Comeback Cities: A Blueprint for Urban Neighborhood Revival, former HBS senior lecturer Paul S. Grogan, who also served as Harvard's vice president for Government, Community, and Public Affairs, and coauthor Tony Proscio point to four encouraging trends that give cause for guarded optimism: the maturation and expansion of a large network of grassroots community organizations; the increasing tendency of businesses, large and small, to identify the inner city as an untapped market; a drop in urban crime rates; and the "unshackling" of inner cities from the entrenched and outmoded bureaucracies that have long governed welfare, public education, and public housing. Although heartening, Grogan and Proscio admit that these positive trends are fragile first steps and "entirely reversible, if treated with indifference." "The point is not that poverty has been abolished, or will be," they note, "nor is it that cities can or should return to the full glory of their wealthier pasts. The point is that they are becoming places where people want to live, shop, run businesses, and go to school."

At HBS, a number of faculty are engaged in research and teaching projects that treat these recent developments in urban areas with anything but indifference. Whether they are helping inner cities capitalize on their inherent competitive advantages, working to make assetbuilding financial services available to low-income families, analyzing the benefits of welfare-to-work programs, or inspiring MBAs to forge strategic partnerships that will benefit both communities and businesses in the coming decades, HBS professors are making a significant contribution to the urban recovery movement.

Building Sustainable Communities

"Many approaches to revitalizing the inner city have focused on the social problems, but the more fundamental issues are often economic," notes HBS professor Michael E. Porter, a world-renowned strategy and competitiveness scholar who began to apply his expertise to help improve inner cities a decade ago. In the early 1990s, with support from then HBS Dean John H. McArthur, Porter oversaw a series of field studies that looked at potential solutions to the problems facing America's inner cities. This research inspired Porter to publish a number of articles on the topic and, in 1994, to found the Initiative for a Competitive Inner City (ICIC), a nonprofit organization that aims to catalyze innercity business development across the United States.

In frequent talks around the country, Porter emphasizes that while programs that alleviate some of the social problems of the inner city (lack of health care and substandard housing, for example) are important, they do not get at all the root causes. "To build healthy and sustainable inner-city communities, it is necessary to create healthy economies in and near the communities themselves," says Porter.

Two examples of successful investment in the inner city that Porter has written about are Sprint and Walgreens. In Missouri, Sprint decided to locate a new call center in a struggling section of downtown Kansas City and provide job training for nearby residents. The new urban facility was pleasantly overwhelmed with applications and now employs local residents, many of whom walk to work, with much less turnover than Sprint's suburban call centers. "They took a risk, but it paid off - they now have a solid pool of workers who are very happy to have good jobs in their own neighborhood," says Porter. Walgreens has made a concerted effort to locate more stores in urban areas where residents do not have access to large drugstores, recognizing a considerable, underserved market that has been documented in ICIC research. City dwellers are now taking advantage of the chain's employment opportunities as well as its discount prices and large selection of merchandise.

As Sprint and Walgreens have shown, Porter notes, companies that invest in the inner city and entrepreneurs who start businesses there are well positioned to take advantage of a growing, local labor pool; the efficiencies of a central location with access to other business and transportation infrastructures; and the unmet needs of eight million households (with $100 billion in retail demand). Businesses can and do thrive in these regions that have often been misconstrued as bad for business. "Economic development in inner cities must be approached from the perspective of competitiveness, and it must be based on business opportunities in the inner city that are genuinely profitable," observes Porter, who was named Bishop William Lawrence University Professor last year, becoming only the fourth HBS faculty member to attain Harvard's highest academic rank.

With Porter as its chairman and CEO, the ICIC has a mission to "spark new thinking about the business potential of inner cities, thereby creating jobs and wealth for inner-city residents." The many programs that the initiative runs include a city advisory practice -that works with several metropolitan areas, including Boston, Hartford, Kansas City, Milwaukee, and St. Louis - and a $130 million private equity fund to make capital available to inner-city companies. Each year, the initiative partners with Inc magazine to publish the Inner City 100, a list of the 100 fastest-growing urban businesses.

This year, the ICIC and the School's Executive Education Owner-Managed Programs will offer a special one-week general management seminar for the IC 100 CEOs. "If we can get companies like these growing in America's inner cities, jobs, income, and wealth will follow," says Porter, who will teach in the program that is designed to provide the necessary tools to CEOs of rapidly growing companies. "Urban areas are becoming a new arena for innovation, transformation, and growth in our economy. The business community in America can do something positive about inequality. We are hoping to engage more and more companies and alumni in bringing the power of the market system to the inner city."

Partnering for Success

HBS professor James E. Austin, a thirty-year resident of Boston's inner-city Dorchester neighborhood, has long been interested in the revitalization of urban areas. "I have personally witnessed the challenges and opportunities embedded in our urban communities," notes Austin, who has studied extensively the role that business can play in such areas. "The corrosive effects of urban decay have pushed many cities into a devastating downward slide. Unless business leaders are centrally involved in generating solutions to the pressing urban problems, there will be no lasting solutions." Austin, the John G. McLean Professor of Business Administration, chairs the School's Initiative on Social Enterprise, teaches the MBA elective Entrepreneurship in the Social Sector, and is the author of numerous articles and cases on the subject. Stressing the power and importance of a multifaceted approach to renewal, Austin has studied business leadership coalitions (BLCs) in Cleveland, New York, Atlanta, Minnesota, Detroit, Boston, and Pittsburgh.

"A small number of key business leaders can make a big difference by leveraging their leadership," observes Austin. He points to Cleveland Tomorrow, the organization formed after Cleveland declared bankruptcy in 1978 that played a key role in transforming the city into a repeat winner of the National League of Cities' All- America City Award. The group was successful, Austin asserts, because it took the time to diagnose the city's problems carefully and delineate solutions. The organization also decided early on to be a catalyst and facilitator of change rather than actually providing programs. Working in partnership with city, county, state, and federal government officials and a multitude of leaders from the civic sector, Cleveland Tomorrow has been involved in building a sports complex and a science museum, renovating the theater district, cleaning up the waterfront area, restoring the city's NFL franchise, securing the rights to house the Rock and Roll Hall of Fame and Museum, and developing affordable neighborhood housing.

"The complexity and tenacity of the problems afflicting a city require a high capability for analyzing problems, delineating strategies, and ensuring implementation," says Austin. "These problems require an understanding of economic development and the capacity to mobilize and effectively deploy resources. They require entrepreneurial thinking and action, which are precisely the talents of business leaders." In addition, he adds, the benefits to businesses that get involved in their own cities are high: healthy communities boost competitive advantage, community service makes better leaders, and the common interests of business can be leveraged through collaboration.

While business is key to the successful revitalization of urban areas, Austin notes that other alliances are also important. He sees a future in which leaders from all sectors build relationships that will improve the social and economic conditions in which inner-city residents live and work. "Cross-sector partnering between business, government, and nonprofit sectors will be the collaboration paradigm of the 21st century," he asserts.

Teaching Millions

"Most of us spend the lion's share of our careers teaching thousands of people the way to earn millions of dollars," observes Peter Tufano, the Sylvan C. Coleman Professor of Financial Management and chair of the Finance unit at HBS. Although his primary research, which focuses on financial innovation and the use of financial engineering techniques by corporations, may fit this general description, for some time now Tufano has also been involved in a very different project aimed at "trying to teach millions of people how to earn thousands of dollars."

In the mid-1990s, Larry Fondation, a community organizer in South Central Los Angeles and Tufano's Harvard College roommate, alerted Tufano to the plight of low-income wage earners who traditionally have been left out of the loop when it comes to access to financial services. "There are a lot of check-cashing services, pawn shops, and payment and loan services in neighborhoods like South Central LA," Tufano notes, "but very few institutions that would help people accumulate savings." A 1999 Harvard Business Review article cowritten by Tufano, Fondation, and Patricia Walker revealed that South Central had only seventeen depository institutions to serve more than 600,000 residents. In that article, "Collaborating with Congregations: Opportunities for Financial Services in the Inner City," the authors argued that inner-city populations become more attractive to financial institutions as potential customers when they are grouped together under the umbrella of community organizations such as churches. "One customer with a $500 savings account is not very interesting to a financial-services firm," Tufano observes, "but twenty thousand investors with $500 each can open a lot of doors."

Tufano quickly became interested in not only studying the phenomenon but in "actually trying to make something happen." Aided by the groundwork of a number of enthusiastic HBS social enterprise field-study teams, in 2001 Tufano launched the D2D Fund, Inc., a nonprofit company that is creating partnerships between government, large financial institutions, and community-based organizations to encourage asset building. Located in Boston's inner-city Roxbury neighborhood, the firm, Tufano explains, aims to "build a road between the low-income community and traditional financialservices firms that don't have an off-ramp into that community."

D2D (which stands for Doorways to Dreams) relies on the promise of an innovative program called individual development accounts (IDAs). "IDAs are like 401(k)s for people without access to employee savings programs," Tufano notes, "and they've proven to be very successful in field tests." The problem, he explains, is that only ten thousand people in the country have IDA accounts, out of an estimated forty million eligible families. Tufano has been working as an advisor on legislation currently being developed in Washington that would provide matching funds for education expenses and home purchases for a million new IDA holders.

But even if that funding comes through - no easy task, given Washington's post-September 11 spending priorities - convincing financial institutions that low-income savers present a viable business opportunity remains a tough challenge. "You have to get the price per customer per year down sufficiently low so institutions are willing to handle an account with a few hundred dollars," Tufano says. To that end, his D2D Fund has partnered with SunGard, a leading technology firm, to create back-office and middle-office operations to handle account processing. "We're pooling the assets of small, low-income consumers and adapting 401(k) processing machinery to serve them. We're also working on regulatory clearance with the SEC, so in essence, we're trying to solve all the hard problems that have kept financial institutions from stepping up to the plate. Our watchwords are low cost, portable, scalable, and national."

Tufano has given a number of presentations on this topic over the last few years, and he admits it's sometimes a little like "standing against the wind." "Community organizations are wary of the concept because it's something new; financial institutions are worried about losing money; the federal government is concerned about compliance problems associated with designing a new system to serve so many people; the lawyers are worried about SEC regulations," he says, reciting the litany of objections he has heard all too often. Then, taking a deep breath, Tufano adds, "There may be a fairly low probability that we'll help all forty million people with this. But even if we could reach a fraction of the total, just think of the potential."

The Neighborhood Grocer

In addition to the scarcity of financial services, inner-city residents often face a lack of basic services. Many large retail stores, for instance, are not interested in launching locations in urban areas because they are put off by perceptions of low-income levels and high crime rates.

David Crockett, a post-doctoral research fellow who coteaches the required MBA ten-session Social Enterprise course, has studied consumer patterns and attitudes regarding purchasing groceries in the inner city. As a doctoral student in marketing at the University of Arizona, Crockett wrote his dissertation on how residents of the metropolitan Milwaukee area cope with the lack of large grocery stores in their neighborhoods. "Retailers tend to think that everyone who lives in the inner city is poor," he says, "but that simply isn't true. The average income may be low, but the range in income is high, as is the density of the population." Crockett found that while there was a small group of inner-city residents who were forced to do all their shopping within their communities, most had ways to at least occasionally make trips to larger stores that offered lower prices, greater selection, and fresher produce.

In interviews with inner-city residents, Crockett learned that those who could shop outside their neighborhoods were often conflicted about it. "Many felt that not only was it inconvenient, but it didn't get money circulating in the neighborhood, and therefore, the neighborhood didn't get the secondary benefits of capital flow," he says. This suggests that innercity supermarkets would enjoy a customer base predisposed to be loyal. Crockett found that when they did shop at the local, smaller markets, "consumers were forced to be extra vigilant and inspect their groceries more thoroughly - checking expiration dates and so forth."

As it happens, a large grocery store chain recently moved into the neighborhood Crockett studied, and he hopes eventually to return to Milwaukee to document the impact the new facility is having on the community. "Clearly, having a good grocery store within walking distance will make a big difference in the neighborhood," he says.

Investmentsand Insights

Rosabeth Moss Kanter, the School's Ernest L. Arbuckle Professor of Business Administration, is a noted authority on business strategy, leadership, and innovation who has studied the contributions that businesses make to the social sector as an extension of their strategies.

"Companies should approach the inner city not as an object of charity, but as an opportunity for learning and business development," says Kanter, who believes that what she calls "corporate social innovation" can help revitalize ailing cities. In 1998, she conceived and led a national conference on Business Leadership in the Social Sector (BLSS) to determine how business resources could help alleviate social-sector problems. The success of the conference led Kanter to develop a video series as well as an MBA elective seminar with the same title.

One area where Kanter has seen noteworthy, mutually beneficial success is in partnerships between corporations and schools. Bell Atlantic's Project Explore in Union City, New Jersey, for instance, helped the company find new ways of handling data transmission and refine its goals for video on demand. In turn, the project "became a catalyst for increasing the use of technology to transform middleand high-school classrooms, to improve students' skills, and to involve parents in their children's education," observes Kanter, noting enthusiastically that the partnership helped save Union City schools from state takeover. IBM's Reinventing Education program has met with similarly impressive results in collaboration with schools in 21 U.S. cities and 4 other countries. "Many product innovations, which benefit both the schools and IBM, have resulted from this initiative," Kanter stresses.

Kanter has also studied corporations that have successfully launched welfareto- work programs, including Marriott International's Pathways to Independence initiative. The Marriott program trains former welfare recipients and guarantees them jobs upon completion of their training. "The challenges of working with the unemployed has led the company to new insights about training, job placement, and supervision," says Kanter. She adds that when United Airlines launched a training program for inner-city residents, featuring one-on-one mentoring for new hires, it proved so successful that the company began to mentor all new hires. "Traditional solutions to America's recalcitrant social ills amount to little more than Band-Aids," says Kanter, who believes that strategic business investment in inner cities goes much deeper and will produce "profitable and sustainable change for both sides." In her latest book, she looks at a number of companies that found that community service was a logical extension of their business strategies. Kanter hopes her research will inspire more companies to take advantage of the benefits of investing in urban areas. "The future of our nation really depends on it," she emphasizes.

Students and Corporate DNA

Diana B. Barrett, a senior lecturer at HBS, took over Kanter's Business Leadership in the Social Sector (BLSS) seminar last year. A member of the School's Initiative on Social Enterprise core group, she has spent most of her professional career to date exploring the applicability of corporate models to the health-care field as well as other community-based needs.

Barrett has kept Kanter's basic approach to the course, which, she says, "is to help students understand how businesses can contribute to new solutions for unmet social needs and unsolved societal problems." However, with added materials from Barrett's own research on healthcare management and social enterprises in developing countries, including Mexico, Colombia, and India, BLSS has evolved from a seminar into a full course in the elective MBA curriculum. While the international perspective has broadened the course, cases specific to challenges in the inner city - such as Austin's Cleveland turnaround case and Kanter's case on Marriott's welfare-to-work program (read more about these cases) - are still key components.

"Class discussions in this course are particularly invigorating," Barrett reports, "in part because we have a significant number of cross-registrants from the Kennedy School, the School of Education, and even the Fletcher School at Tufts. These students often have a very different worldview that they use to challenge some of the attitudes held by our MBAs."

Throughout the twenty-session BLSS course, students are asked to examine a range of strategic partnerships that occur when senior executives in business and social-sector organizations recognize that their needs can most easily be met by one another. "We try to build up a tool chest of the skills needed to be able to choose appropriate partners, forge alliances that work over time, and develop an exit strategy," notes Barrett, who this year is introducing some new material on performance measures. "Suppose your company hires a large number of people who previously were on welfare, or wires the computers in a local school system," she posits. "How do you know when you've been successful? It's not as if you can track an increase in market share or see the impact in your bottom line."

Students are also asked to consider how companies reward managers who spend time building strategic partnerships in the community. "This kind of activity isn't part of most people's performance appraisals," Barrett says, "and that's a definite barrier to involvement. One of the things we talk about is how you begin to work this into the DNA of a company, so it's as important as any other measures that are applied to employees."

When they leave the course, Barrett hopes students will take away a realistic understanding of the time, energy, and human capital required from corporations involved in working on complex social problems such as inner-city development. "Many of our students will end up at companies that will be called on to play a role in societal issues - in the local, national, or global arena," says Barrett. "I want them to know how to help a company analyze and address those issues in a thorough, systematic, and businesslike way. For corporations to make a difference, that kind of leadership is what it takes."

The Case for the Inner City

A sampling of case studies related to the inner city written by HBS faculty.

Bell Atlantic and the Union City Schools
This five-part series examines Bell Atlantic's Technology in Education partnership with the Union City, New Jersey, public schools. The cases include overviews of the changing telecommunications marketplace, education reform efforts, how Bell selected Union City, the objectives of both partners, and outcomes of the partnership.

First Community Bank
A two-part series that presents BankBoston's bank-within-a-bank, FCB, which was designed to serve urban communities. The first part discusses issues related to founding FCB and achieving profitability, while the second details the struggles of integration when a new parent company takes over.

IBM's Reinventing Education
This three-part series details IBM's national innovation strategy to transform public education using the company's engineers and outside IT consultants. It discusses IBM's educational partnerships, including those in Florida, Ohio, California, Pennsylvania, West Virginia, and Ireland.

National Foundation for Teaching Entrepreneurship
There are two cases on NFTE, a nationally recognized nonprofit organization for teaching entrepreneurship to disadvantaged youths. The first case, "Steve Mariotti and NFTE," centers on the nonprofit's founder and the challenges of taking an organization beyond the founder-dependent, informal start-up stage of development. A second case on strategic planning at NFTE was recently published.

Pathways to Independence: Welfare-to-Work at Marriott International
This case highlights Marriott's welfareto- work program, which trained over one thousand people in eight years and retained its participants at a rate about 20 percent higher than the figure for regular hires. The focus of the case is the feasibility of expanding the program.

Supermarkets in Inner Cities
A study of the challenges and opportunities inherent in operating supermarkets in inner-city neighborhoods, the case emphasizes the importance of cross-institutional collaboration, the problems of political processes, and the strategies needed to gain community involvement in inner-city economic development. This case will soon be updated with a video component.

The Cleveland Turnaround
This four-part series traces the Cleveland community's efforts to move the city from economic, social, and political crisis in the 1970s through revitalization into the 1990s. Each case addresses a different aspect of the turnaround: responding to the crisis, building on progress, facts and figures, and challenges for tomorrow.

United Airlines: The Friendly Skies
This video case details how United Airlines committed to hiring former welfare recipients to meet its need for entry-level workers and in the process developed an effective mentoring program that has potential for all United employees.

by Deborah Blagg and Susan Young
Send e-mail to the authors: Deborah Blagg and Susan Young
illustration by Carl Wiens

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