The Business Ecosystem
“A country can become complacent about its assets.”
An interview with Rosabeth Moss Kanter, Arbuckle professor of business administration, in HBS’s general management unit, and chair and director of the Harvard University Advanced Leadership Initiative. Read the complete article, “Can America Compete?” (September-October 2012)
Harvard Magazine: What do you mean by “enriching the business ecosystem”?
Rosabeth Moss Kanter: “Ecosystem” conveys the idea that all the pieces of an economy come together in particular places, and that their strength and interactions determine prosperity and economic growth. In Silicon Valley there is a sense that you prosper only because you’re surrounded by lots of resources that make it possible to succeed, beyond what your own entity controls. Think of it as your garden, where you need fertile soil, seeds, and other ingredients to make things grow.
I chose “enriching” carefully because it not only means richer nutrients in your garden, but also the sense that we want continued prosperity. We want more people to feel they have rich lives and opportunity ahead. That is important.
In the mid 1990s, I worked on helping communities around the country adapt to disruptions from the Internet and globalization—trends that were very good for the prosperity of the country overall, but had communities worried about being left behind. I developed the idea associated with this transition from the industrial to the digital in World Class: competitive communities had to reach the highest standards in the world because your customers and employers now knew what the highest standards were, and didn’t necessarily need you to access them—they could go even outside their country. Those developments pointed to networks and larger systems—what cities and regions and small businesses needed to do to remain prosperous.
I identified three archetypes then, suggestive of different kinds of ecosystems. Greater Boston, like Silicon Valley and Austin, Texas, prospers because of thinkers—if you innovated and had new ideas, you attracted resources. Companies gravitate to new ideas because innovations sell at a premium in world markets. Spartanburg-Greenville, South Carolina, exemplified makers. It became a global manufacturing hub and attracted foreign companies by investing in American workers, especially in the skills needed for advanced manufacturing of, first, textile equipment and eventually automobiles. Today, that area has become the new Akron (while Akron has moved on to new technologies): it leads in making tires, having broadened its manufacturing skills. My third model was Greater Miami, a region of traders that went from being a sleepy southern city to operative capital of Latin America, attracting finance and logistics and many companies’ Latin American regional headquarters.
In each of those places, leaders created a regional theme and invested in aligning many organizations to support it.
HM: What factors make that ecosystem function better?
RMK: Four issues strike me as key: turning ideas into enterprises; linking small and large businesses; better connecting education to jobs; and encouraging cross-sector collaboration. Each focuses on actions on the ground, in different regions, within our national and business contexts—whatever those may be. Let me give an example. Civic leaders in Milwaukee are creating a global hub for water-related businesses by linking manufacturers of pipes and controls with entrepreneurs who are creating urban fish farms, and both with new research centers—including the nation’s first graduate school of freshwater sciences.
The first is how ideas become enterprises. This has been such a great U.S. strength that we haven’t nurtured it. A country can become complacent about its assets. There is an assumption that small start-ups create the lion’s share of jobs, but since the financial crisis they have lost their leading position in terms of the number of jobs created. And the start-up survival rate slipped a little—slightly less than half survive at the five-year mark.
For all the money poured into scientific research, very little was finding its way into the marketplace. Basically MIT and Stanford were taking the lead in finding ways to license ideas that have commercial potential. Elsewhere, there was a tendency to emphasize the revenue from selling a license, rather than whether an enterprise created jobs. Knowledge is the best resource we have. It wasn’t any particular industry that made the difference in the transformation and prosperity of Boston and eastern Massachusetts—it’s our fundamental ability to keep creating new knowledge. So, how do you make sure that knowledge creates jobs, and those jobs reach all parts of the community and that knowledge will be translated into a global competency?
There is evidence that if you make the connections between knowledge creators and businesses tighter, you can increase success. Compared to stand-alone business incubators, university-based incubators tend to keep more people in the community to start their enterprises and tend to have higher success rates, because they are able to connect small enterprises with mentors. Small business needs capital but it also really needs expertise—so Harvard’s new Innovation Lab is a fantastic thing.
Another aspect of moving from knowledge to enterprise to jobs is collaborative knowledge creation. It’s very difficult to manage, but if you get a number of companies collaborating with a number of universities, you have a better exchange of ideas, and you’re also more likely to have competition among them to apply the knowledge. The semiconductor consortium in Albany is an example. A university had already invested in a technology of the future and that attracted investment from lots of companies, no one of which would want to make that investment alone. In time they will want to have their own proprietary piece, but then you can get the business-school students excited about the opportunities in these fields and you begin to thrive locally in the global economy. That’s thinkers plus makers in Albany.
We have long relied on federal funds from the National Science Foundation and the National Institutes of Health for the basic research that supports innovation—private companies cannot support enough basic research on their own. We have seen how in biomedical science, subject to suitable controls, networks productively connect publicly funded research and privately funded companies, hospitals, and other local institutions. We need to continue those investments, but those and other federal expenditures have to be better targeted because not every city needs a semiconductor consortium or a biomedical focus. You want to invest in places that can take the best advantage of certain strengths, and then have other places find their key assets, so they can compete for some of that funding, too.
HM: How do new ventures operate more successfully in a stronger business ecosystem?
RMK: That’s the second idea: small businesses—particularly new enterprises—often need larger-company customers. When they’re in the purchasing stream, they do better. In fact, tech companies funded by corporate venture capital often also got a customer who helped improve the product. I’ve done a very informal study that shows that dominant companies in seven different technology sectors might have had better partners earlier. Every small firm benefits if it can get more business from large ones. It’s not just revenues; they also get competence and opportunity.
So, how do you connect small to large? We should have a national call to action with commitments from big companies to mentor and connect with smaller enterprises. Procurement became global because it was more efficient to consolidate global purchasing. But global supply chains are cumbersome. Many would rather buy here if they could find more sophisticated suppliers more easily in the U.S.
I was a consultant to IBM and mentioned this idea; they ran with it and created Supplier Connection—a universal vendor application, kind of like the common college application. They announce opportunities through Supplier Connection to thousands of small businesses. Initially, about 16 big companies started with a few purchasing areas—and expansion plans are in the works. Everywhere I’ve spoken about these ideas, civic leaders get very excited about linking small to large in their own region.
HM: What about the linkage between education and job skills?
RMK: We have been talking about school reform since I was a child in school. Preparing people for the workforce is getting more critical today: up to three million jobs are unfilled because of an absence of vocational skills—“middle skills.” Germany is an economic success because of a manufacturing system in which people apprentice to learn skills. Sometimes they then go on to four-year colleges and get advanced degrees, but skills apprenticeship is a much more prominent part of the workforce.
Where do those skills come from? Community colleges are suddenly the darlings of the U.S. policy world because they’re the only entities we have that are supposed to prepare people for occupations. Every tech area of the country has a shortage of software engineers—who need some programming, but not a four-year degree. You can send data anywhere. Are we going to outsource those jobs?
In fact, community colleges haven’t been well connected to employers—and their graduation rates have been incredibly poor. In Chicago, fewer than 9 percent of those who start have graduated within six years. It’s the problem of disconnection. But when connections between employers and community colleges or training centers are strong—for curriculum development, customized job training, post-graduation interviews—outcomes improve dramatically. There are growing consortiums where leaders of organized labor, community colleges, high schools, businesses, and representatives of the elected officials sit down together to talk about skills needs and who’s going to help deal with them. The two-year colleges in Spartanburg and Greenville were the secret to that manufacturing center. South Carolina is still not the most prosperous state, but it would have been Appalachian poor if not for Governor Dick Riley (later U.S. secretary of education) focusing on the community colleges in collaboration with the industrialists.
It strikes me as such a no-brainer, but there’s no real national policy here. What an opportunity: the evidence is that you get better outcomes in terms of people finishing their two-year programs and getting jobs when there’s a closer tie to employers. This is a way for people to learn useful skills, ways of thinking, science and technology. Rethinking education and work is ripe for innovation. New York City opened its first six-year high school in 2011: a partnership of the schools, the community-college system, and IBM. Urban students, selected randomly, start college courses as early as tenth grade; when they finish grade 14, they will earn a high-school diploma, an associate’s degree, and a job interview with the company. New York is already expanding this model, and Chicago has adopted it with other technology companies.
HM: Does that amplify your concept of place-based business ecosystems and connections among actors “on the ground?”
RMK: Yes, as I was looking for ideas to solve a lot of problems at once, the final one is community leadership and collaboration across sectors. Even if we suddenly had a national program throwing money at community colleges, you still need community leaders talking to each other—where people agree on certain priorities, align their interests, align what they do behind those priorities. Those with management competence can help those without—whether public helping private or vice versa. Those collaborations are fruitful and a source of exciting institutional innovations—from universities incubating ventures to six-year high schools to regions becoming world-class by focusing on areas of knowledge that also stimulate local businesses.
In general, every social and economic institution comes together on the ground in business ecosystems like Boston or Albany. You can have national policies for X, Y, or Z, but they intersect in particular places. I return to that because everything wrong with America is more easily fixed, can become right with America, on the ground. That’s where you have less partisanship. People are fighting in Washington about the size of government, but local civic leaders, private businesses, and ordinary citizens see connections in their own particular place. That’s always been an American strength. We can’t compete with China’s national government, tearing down an area and having an entire new city in a year or two. That’s not how we operate. Our strength has been from the ground up. National policy can certainly facilitate things—or not—but you don’t have to wait for a government law or allocation.
If I were handing out federal funds, I would give more money to those who prove they’ve got such a partnership, who have a commitment to collaboration across sectors and who create institutional innovations. There’s a role for businesses large and small, government, and civic leaders dedicated to their regions. Local is beautiful, even if national can sometimes get ugly.
Next: The Other Commons
“Political dysfunction may well be an important part of the problem.”
David A. Moss, McLean professor of business administration and founder of the Tobin Project