Economic Development’s Next Big Opportunity: Horizontal Innovation

The next big transformation in economic development is coming. It’s about time. Remarkably, most economic development organizations are still playing a game invented in Mississippi in the 1930s. It goes something like this.

  1. Make a quick assessment of your economy to figure out your community’s Strengths Weaknesses Opportunities and Threats, the SWOT analysis. (Hint: Hire a consultant if you need to.These are “strategy” consultants who help you with defining your strategy. In the process, you will undoubtedly find that you have all of the elements that any company would ever want in order to locate in your community:  competitive commercial and industrial real estate, a committed workforce, a great place to raise a family, a fantastic quality of life. You might also learn that you have some “clusters”. If you don’t know what that is, ask your consultant.)
  2. Develop a list of target companies that would just thrive in your community if only they located there. (Again, hire a consultant if you need one. This consultant might be a slightly different. Figure on hiring a site selection consultant, who also works with companies looking for new locations. Never mind the potential conflict of interest.)
  3. At about the same time, develop some marketing materials, the slicker the better.  (After all, you need a brand if you’re going to sell your community as a product. You will probably need another consultant here: a marketing firm for ads, billboards, and a web site.)
  4. Make sure you have some incentives in your back pocket to “sweeten the pot”. (Work with your local and state government officials to make sure that they know their role: giving away taxpayer money all in the name of “creating jobs”.  They’ll be some consultants that are interested in helping you here as well; in addition to site selection firms, you can get advice from law firms and accounting firms. They’re interested in making money off the deals.)
  5. Bait your hook and go fishing. Make sure you have an expense account, though.  No self-respecting economic developer goes anywhere these days without a set of golf clubs and a list of good restaurants in their back pocket. (The obvious targets, though, are right out your back door, in the next state or one county over. Ignore the critics who claim you are simply smokestack chasing. What do they know about the practical politics of recruitment?)

There’s only one problem with this traditional game. It doesn’t work very well anymore. It really ends up wasting a lot of money ($80 billion a year by one estimate) and can — in the worst cases — lead to political embarrassment.

Mississippi: The Birthplace of Traditional Economic Development

Despite this fact, most communities, regions and states are still playing the traditional game. The basic ground rules were set in Mississippi in the 1930s. After World War II, propelled by lower-cost, non-union labor, plenty of open land, a new interstate system, and the widespread adoption of air-conditioning, the Southern states successfully lured manufacturing plants from cramped, older industrial locations in the North. It started with textiles and shoe plants from New England, but moved on to eventually capture the big prize: automobile production.

This process worked extremely well for about 20 years. However, by the early 1980s a new dynamic reshape the game: globalization. The roots of shift actually date back to the 1950s, and the innovation in the containerization of freight. By the 1960s, international communications and commercial air travel began to flourish. In the 1970s, Congress began slicing trade barriers.

By the 1980s, big companies began to move major chunks of their manufacturing out of the U.S. Other manufacturers, most notably the steel industry, withered under the pressure of increasingly intense global competition. (Sidebar:  As a corporate strategy consultant in the 1980s working for General Electric, I worked on consulting teams engaged in moving appliance and small motor manufacturing out of the U.S. This is when you started to see the growth of maquiladora plants along the Mexican border.)

In the late 1970’s and early 1980’s the devastation of globalization began hitting “rustbelt” communities like Detroit, Milwaukee, Youngstown and Cleveland. Meanwhile, states in the Sunbelt, continued playing their old economic game, with a new set of targets in mind: foreign companies looking to locate closer to the U.S. market.

Meanwhile, in the 1980’s “Rustbelt” communities, stung by their manufacturing losses, began to copy the formula of the Southern states. Utility companies in the North, worried about losing more of their their “load”, urged state and local economic development officials to follow the formulas of the Southern states.


netsThe Emergence of Clusters

Around this time, a few states, notably places like Massachusetts and Connecticut, began experimenting with a new model of economic development, based on technology development and innovation. (Michael Dukakis even fashioned his presidential campaign in 1988 around the “Massachusetts Miracle”.) These early efforts at innovation and technology development did not have much impact until Michael Porter showed up in the 1990’s.  Porter began moving economic development in a new direction. In books and articles, he argued that the path to prosperity for regions, and even inner cities, lie in the development of “clusters”.

In traditional economics, clusters are not a new idea. But from the standpoint of economic development strategy, Porter’s cluster theory seemed to hold remarkable promise. Porter was suggesting that the future prosperity of any region starts with understanding the linkages among companies, higher education, government and non-profit organizations already in the region. Strengthen these linkages, Porter seemed to be saying, and prosperity will follow. You control your destiny.

With a few detours — like Richard Florida’s quite clever Creative Class —  cluster theory has dominated a lot of the thinking in economic development over the past two decades.  In recent years, both the Economic Development Administration and the Small Business Administration have been promoting clusters as the approached that makes the most sense and building regional economies.

And it probably does. The problem, however, is that few people have figured out how to build clusters. The Europeans, not surprisingly, have taken a particularly bureaucratic approach to cluster development. Here, in the U.S., also not surprisingly, our approach has been far more eclectic and experimental. (One of the latest iterations involves Brooking’s idea of innovation districts.)

Figuring out the “How” of clusters

Up until recently, though, we’ve been missing a major piece of the puzzle.  We’ve lacked a coherent framework for execution, a strategy discipline.  Without this discipline, we cannot take the idea of clusters and translate it into something practical. We cannot replicate, scale snd sustain initiatives that actually improve the pattern of productive investment in a region.

Here’s the big question. How do we develop and execute a strategy in open, loosely connected networks, where no one can tell anyone else what to do? And how do we do that, not just once, but over and over again?

The old approach to strategy – – strategic planning – – like traditional approaches to economic development are anachronistic. They don’t work very well. Like the steam engine, they were invented for a different time.  Just as traditional economic development thinking, born in Mississippi in the 1930’s, has become increasingly less sensible, traditional strategic planning, which emerged out of World War II, has run its course. The process is just too slow, costly, and unresponsive to be useful in most situations.

Creating a new approach to strategy designed for networks

Until now, we have not had anything to replace it.  Over the past two decades, we’ve been working on this problem. Beginning with our work in Oklahoma City in 1994, continuing on to working with Ernest Andrade on the Charleston Digital Corridor beginning in in 2001,  I began experimenting with new approaches to strategy that are more agile and less costly.

In the past decade. a small team at Purdue has incubated this new agile strategy discipline, which is specifically designed for open, loosely connected networks. Our work now extends internationally. We are working with universities in the U.S. and Australia and with the Fraunhofer Institute in Germany.

We have shown this new discipline to work in diverse settings, from the rebuilding of neighborhoods in Flint, to the design of a new open innovation network for Lockheed Corporation, to the transformation of engineering education at 50 universities. In sum, we are not just developing clusters (although we are doing that). We’ve learned ho to  accelerate the formation of innovating networks.  Call them clusters if you like.  We prefer the idea: “horizontal innovation”.

Equally important, over the past decade, we’ve learned how to teach this discipline. Our friends at Kansas State University call it a protocol for collaboration. We call it Strategic Doing.

Companies are starting to catch on. Since 2006, when Henry Chesbrough introduced the idea of “open innovation”, companies have been struggling with how to implement it. We believe we have cracked the code of complex collaboration that underlies open innovation.

I’ve worked with large companies trying to do open innovation, but the Strategic Doing process is unique. This is the most clear and concise open innovation process I’ve seen.

Mark Scotland, CEO, 4.0 Analytics

Because this new strategy discipline is teachable, it is replicable and scalable.  We are teaching people to come together, uncover their hidden assets, and develop new “link and leverage” strategies all in the space of a few hours. As teams learn by doing, they make adjustments and continue onward. We are now working with a wide range of university partners to move this discipline across the U.S., Canada, Australia and Europe.

In early September, we will be announcing a new initiative at Purdue to spread the promises of horizontal innovation to universities and companies; civic organizations and government; and communities and regions.  We see the dawn of a new era in economic development.