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8 Responses to “Changing strategy direction in Cleveland”

1. John Polk Says:
   July 20th, 2009 at 6:21 pm

   Wow…Because you’re an outsider, not an insider, you have no idea how much WORSE it would be if we weren’t spending tens of millions of dollars on all our economic development institutional infrastructure, projects and programs…As The Hastily Made Cleveland Tourism video proclaimed, “We’re Not Detroit!”

   As a quantitative matter, how do we measure the NUMBERS of jobs added or lost along the continuum from Riverside to Detroit? Riverside did 4.1 percent job growth; how many jobs does that represent? I generally find numbers more educational than percentages. Chamber surveys are often slippery about data; it’s possible the percentages work in Atlanta’s favor, even if the numbers themselves aren’t that impressive.

   And I wonder how these numbers might have changed since the data was collected.

   By any measure, I’d be hard-pressed to explain Cleveland’s lackluster (!) performance on this and many other measures if I were a local economic development executive. Which is probably why ours probably choose to ignore ignore them.

2. Ed Morrison Says:
   July 20th, 2009 at 10:38 pm

   John:

   Percentages are useful for comparative performance. These are annual rates over a ten year period, During the Clinton years, national job growth averaged 2.3% per year. During the Bush years, employment growth slowed to 0.5% per year.

   The point is that during a period of general employment expansion, the five counties in the Cleveland Metro shrank. Among the 25 largest metros, only Detroit performed more poorly.

   Economic development strategies work on the edge of markets. They are most effective when they absorb a portion of the risk for innovative investments. In this way, they encourage (through leverage) the private sector to expand the boundaries of existing product markets.

   You can see a graphic that explains this process here. (It will be explained in more detail in our Purdue report on regional innovation that will be released this fall.)

   No economic development initiative — standing alone — can be transformative. The metro GDP for Cleveland is about $100 billion. The Fund for the Future invest $9 million a year.

   Without leverage, this investment will do no more than a pebble thrown in Lake Erie.

   This is where the power of networks (clusters) enters the picture. The network effect (or the Metcalfe effect) opens the door to exponential impacts as networks develop. This dynamic has been well documented. The seminal work in regional economies was done by AnnaLee Saxenian in her book Regional Advantage.

   It’s the same idea that Michael Porter explores in his work on clusters or that Paul Krugman points to in the spatial concentration of agglomeration economies.

   Until recently, no one had “the code” for developing clusters. I won’t say that we have figured this out completely, but our understanding of clusters and open innovation networks (how to form them, how to measure them, how to focus them strategically) is accelerating rapidly. Case in point: the rapidly evolving Milwaukee Water Cluster.

   Regions that figure this out, as I mentioned in the original post, will be more competitive over the long run. Businesses in these regions will be more agile. More entrepreneurial. They will consume huge amounts of brainpower and push up incomes in the bargain.

   From 1998 to 2007, the Cleveland metro lost 68,935 jobs: from 1,333,632 in 1998 to 1,264,697 in 2007.

   Most of the weakness comes in the early stage businesses. Stage 1 businesses (1-9 employees) added only 1,300 jobs from 1998-2007. Stage 2 businesses (10-99 employees) added only another 1,300 jobs.

   In more dynamic economies, a different pattern emerges in which Stage 1 and 2 employers generate more jobs. In San Diego, for example, employment growth in Stage 1 and Stage 2 companies was double the new jobs generated by larger companies from 2005-2007. In Austin, it was three times. In Research Triangle, all of the employment growth came from these companies. (From 2005 to 2007, Stage 2 companies, the key growth driver, shrank in the Cleveland metro.)

   Networks sustain entrepreneurs, growth-oriented middle market companies and open innovation. Cleveland is slow to focus on their strategic importance. The evidence continues to accumulate.

3. John Polk Says:
   July 20th, 2009 at 11:56 pm

   Many years ago, COSE considered itself a “gardening” organization. Our role was to identify issues which small business owners (most of them small…fewer than 10 employees) saw as obstacles to their success, and then to seek actionable ways to knock down those obstacles and produce measurable improvements in small business’ performance generally. After all, if every small business in the region could hire one more person, employment could grow by some 60,000 jobs per year.

   The fact that health care costs are significantly higher for small employers was seen to be a barrier to job growth. We tried to address that; at our best, COSE member costs were 30% below the rest of the market…and lower than costs for larger employers (a source of creative tension).

   The high cost of workers compensation coverage was a problem. After 10 years of aggressive lobbying, we succeeded in creating a program which reduced small employers’ workers comp costs by as much as 80%, if they were members of a sponsoring association of employers.

   Other issues…especially taxes, regulation, and workforce readiness…were on the agenda before we were so rudely interrupted.

   Around this time, our friend Richard Shatten shared data with us which suggested that, even though the small business start-up rate in the Cleveland SMSA was lower than the national average, the success rate among those companies which did start, five years out, was higher than the national average. Which produced a significant net increase in employment among small businesses in the region. There were those bold enough to say that from the mid-80’s through the mid-90’s, virtually all the new employment in Cleveland was in the small business community (another source of creative tension).

   And INC. Magazine listed Cleveland among the best places in the U.S. to start a company.

   This, I think, is what you mean by suggesting that economic development programming can have a beneficial effect at the margins.

   But it’s also hard work, and requires focus on the right issues. And our philosophy was that it’s okay to invest big money in a few targeted projects, but that investment needed to be matched by investment in activities whose purpose was to enrich the general environment for small business growth generally, because that’s where the majority on new jobs came from.

   Of course, all this was before 1998.

   We get back to the disconnect between lobbying for public funding to support big projects and actual economic development. And it leads one to question the opportunity costs entailed in pursuing “big bet” strategies without any sort of broader-based activity. In pursuing The Next Big Deal, what resources arr being directed away from more productive activities?

4. Ed Morrison Says:
   July 21st, 2009 at 8:37 am

   John:

   You make good points. COSE played an important role in lowering costs. Lobbying — giving a voice to small business — is important, but it is not enough.

   Cleveland needs businesses that are innovative and oriented toward growth. These businesses need help in growing their top line. That’s where clusters come in. Open, collaborative networks accelerate the flow of resources to these firms. Economic development programs can be designed to fill the gaps.

   Jim Cossler at the Youngstown Business Incubator knows how to develop these open networks. His success is gaining national attention.

   Chris Gibbons and Littleton, Colorado saw this opportunity over a decade ago. He developed the idea of economic gardening as a strategy to fill the gaps of support for growth oriented firms. This strategy, grounded in complexity theory, stimulates endogenous growth within the economy.

   So, for example, in Littleton, the city provides extensive GIS support to smaller firms. They also extend to these firms sophisticated market analysis and market research. These are services that are generally unavailable in the smaller firms within the “entrepreneurial ecosystem” of Littleton.

   In Indiana, we are adapting economic gardening through a new partnership between Purdue’s business school and our agricultural extension offices. We making available sophisticated databases (which cost thousands of dollars each), supported by trained staff, in every agricultural extension office in the state.

   Our strategy is to make our agricultural extension offices a hub of entrepreneurial activity. It will take time to make this transition, but we are well on our way.

   Here’s some examples of other cluster-based strategies. We are developing wellness programs for small manufacturers. Most large companies are self-insured. They have the resources needed to support wellness programs among their employees.

   Small firms do not have this infrastructure, which includes regular health counseling and training to employees about how to access the health care system. Our wellness initiative provides this infrastructure to these firms.

   Here’s an example of a narrower cluster-based strategy. At Purdue, we’ve developed new technology in nano structured coatings for cutting tools. This technology dramatically improves the life and reduces the waste in cutting tools. In partnership with our community college system, we are now training employees in small tool and die shops in these technologies.

   In a broader cluster based strategy, we have launched certificate programs in energy efficiency for manufacturers (Energy Efficiency Practitioner Certification). We are also launching the first national “green collar” certification, which teaches the disciplines of zero landfill manufacturing. We’re accelerating innovation among smaller firms by teaching the disciplines of Eureka Winning Ways.

   With the possible exception of BioE, the economic development strategy at the Cleveland Metro is overwhelmingly focused on transactions. Cleveland will never achieve scale with this approach.

   Unquestionably, Cleveland can achieve some progress compared to a base year performance. But it will never join the ranks of more dynamic regions by focusing on individual transactions. (See my article in New Geography. There are signs that some of Cleveland’s leadership recognizes flaws in the decade old strategy, but there is no rigorous strategic process in place to focus on strategic initiatives and translate ideas into action.)

   Focusing on transactions is easier. When these individual transactions are focused on real estate, like the convention center, the impact will be even smaller.

   The convention center and medical mart have taken over a decade, and a shovel full of dirt has yet to be turned. As economic development strategies go, building a convention center is relatively straightforward. Yet, Cleveland this not have the civic process in place that is capable of making collective decisions.

   Still, if the convention center and medical mart do move ahead, as seems likely, they will generate relatively low-paying jobs and operating deficits (the risk of which we do not fully understand, because there’s been no business plan).

   The idea is that this facility will help build our cluster in healthcare and medical products. Yet, there is no model anyone can point to that demonstrates how this approach can develop a cluster beyond convention business.

   And even here, the projections are wildly out of whack. Commissioner Hagan projects that Cleveland will attract 50 medical shows a year. There is no basis for this projection, and even a casual market analysis suggests that this market penetration is highly unlikely.

   So, Cleveland’s leadership has been spending a lot of time and energy and resources trying to build a 30-year-old economic development idea 10 years late. They’re moving ahead without a business plan and with no clear consensus on the operating deficits that this new facility will generate. They have presented no clear model — supported by facts, not salesman’s puff — on how this strategy will build a healthcare and medical products cluster by meeting specific needs of these companies. Instead, they have relied on press events to sell this idea.

   The weakest component of Cleveland’s position is educational attainment. Early on the Fund fenced off education from its economic development strategy. It has since taken some tentative steps with a “regional talent network” — I’m not sure what that means — but has left education issues largely alone, despite clear evidence from its Voices and Choices initiative that people wanted a focus on education. A planned event in the fall may open the door to the Fund expanding its commitment. Here’s an example from Sacramento of how leaders are linking education and economic development. Download a report.

   The Greater Cleveland Partnership, during its formation, also dodged educational issues. (See the case study on the Greater Cleveland Partnership prepared by Brookings.) In my view, this is a big mistake.

   The reality is that educational attainment drives economic prosperity. There is no separation between economic development and education. By focusing on projects — the next Big Thing — the current generation of Cleveland leadership is leaving an even bigger mess for the next generation to manage.

5. John Polk Says:
   July 21st, 2009 at 3:53 pm

   Let a thousand flowers bloom, I say…

   No single strategy is sufficient to lift a regional economy. But one thing your examples bring to life is that understanding what growing companies need and helping them get it is a key to strengthening community.

   In addition to providing entrepreneurs (and not just a few technology start-ups) with needed services, respecting their needs and listening to them has the benefit of creating loyalty among the companies which become an organization’s constituency.

   E4S and EEdge thrive because their members know their participation is valued. They know their organizations are working for them.

   The top-down model still employed by Cleveland’s corporate and institutional leaders provides little opportunity for companies not on the inside to participate in the civic process. Their central strategy is to keep the inner circle small and united by self-interest. This is appropriate when there’s no data to support the notion that their strategies are working, and plenty to the contrary.

   It’s the position of any entrenched bureaucracy that no one outside the inner circle really knows what’s going on.

   The community’s economic development strategy, if you can call it that, is almost completely divorced from what the general economy, or those who are growing companies in the region, really needs to succeed. The educational attainment issue is a good case in point. If your focus in only on real estate interests and the interests of those who enable them, real education reform isn’t even on the table.

   I expect we’ll hear the casino backers talk about the proposal’s job creation potential. It’s possible that there will be some benefit to those in our community whom education has failed, who may aspire to deal blackjack. But that’s not the basis for sustained economic growth. It’s essentially a trickle-down strategy.

6. Ed Morrison Says:
   July 25th, 2009 at 12:33 pm

   Cleveland is confronting the challenges of legacy civic leadership unable to adjust to new realities. These transformation focuses on the new ways wealth is being created through networks. This move started more than 20 years ago.

   In the early 1980’s I worked for a corporate strategy consulting firm, an offshoot of the Boston Consulting Group. Our clients included General Electric, Ford and Volo. Our work with GE focused especially on building new global manufacturing networks for appliances and electric motors.

   We were able to consider these options largely because of two factors: 1) global logistics and communications technologies had improved sufficiently, and 2) trade liberalization beginning with the 1974 Trade Act largely erased onerous trade restrictions.

   Network business models accelerated in the 1980’s as manufacturers began building supply chains. In the 1990’s companies took the same approach to their customers, and the field of customer relations management emerged. In the mid-1990’s the Internet exploded. After some failed experiments in the dot com era, we started seeing pure network business models emerge and be successful (EBay, Google).

   Many communities in the industrial Midwest are facing difficulty making the shift to new approaches of wealth generation. Pittsburgh and Cleveland – both steel towns – faced the same challenges with the collapse of the steel industry beginning in the 1970’s,

   Fast forward twenty years, and you see how Pittsburgh has begun to accelerate past Cleveland beginning in the mid-1990’s. Detroit and places like Flint and Kokomo have been saddled with companies unable to adjust to new realities.

   To illustrate the impact of different business models, you only need to look and automobile manufacturing in Indiana. GM and Chrysler, companies saddled with a 100 year old hierarchical business model, are contracting. At the same time, Japanese firms Toyota, Subaru and Honda, operate with a 40 year old networked business model. All things considered with the recession, they are doing just fine.

   In any city or region, the pattern of civic leadership tends to mirror the underlying economic structure. In Cleveland’s case, the civic leadership in the 1950’s and 1960’s reflected the executive ranks of Cleveland’s companies.

   My brother Hunter and I grew up in this WASP culture of privilege so we are very familiar with it: University School, Yale, the Country Club, the Social Register, and so on. This culture was exclusive and insular, no Jews and certainly no African Americans allowed.

   You can get a sense of this highly stratified environment, by looking at the pattern of clubs that existed in the 1960’s. Club memberships clearly advertised your position in Cleveland’s social hierarchy. The University Club was the apex for manufacturers, the Union Club was the watering hole for lawyers and bankers. The Country Club was at the top of the country club heap. Next came Shaker. Then Mayfield and Canterbury.

   By the early 1970’s, this highly stratified civic infrastructure collapsed quickly with the demise of Cleveland’s manufacturing base, led by the steel industry. Fast forward thirty years and you see a pattern of civic behavior that mirrors the hierarchical mindsets of the 1960’s. A lot has changed, though, to make this behavior – the penchant for secrecy, all the acting from behind the curtain – dysfunctional. In evolutionary terms, the organism (Cleveland) is slowly dying because its leadership is failing to adapt.

   From where I sit, a lot of Cleveland’s dysfunction can be traced to the bigotry of the post war WASP leadership in the town. Once the WASP leadership collapsed in the 1970’s, Jewish real estate interests (whom the WASP leadership hardly considered legitimate businessmen), gained control of the Cleveland’s civic apparatus. No longer excluded, these leaders are behaving like the WASP kingmakers who for so many years had excluded them.

   There’s only one problem: They are presiding over a rapidly shrinking city.

   Ironically, their dysfunctional “win/lose” mentality accelerates the shrinkage and retards Cleveland’s adjustment to new economic realities. The tighter they grasp — the more they try to dominate the agenda and design the self-dealing fixes — the faster the city shrinks.

   The patterns of behavior set by people like Al Ratner and Sam Miller and organizations like the Greater Cleveland Partnership have led patterns widely visible in the political economy of places like Louisiana, where I lived for a number of years. In these economies collaboration does not happen because leaders are fixated on a simple rule: “If it ain’t mine, kill it.” (In Cleveland, this behavior has retarded the development of a convention center by at least a decade.)

   These patterns of dismal leadership behavior ripple through the Cleveland’s civic space. Staff people (the “mandarins” my brother calls them) mimic the behavior of their principals in order to ingratiate themselves and protect an unquestionably comfortable financial position.

   Others, made fearful of confrontation, twist themselves to accommodate it. All are effectively trapped in the dysfunction, much like an alcoholic so easily traps a family: Co-dependency on a citywide scale.

   Cleveland’s lost decade started in the early 1990’s. It’s now stretching into two. Chances are Cleveland’s population will decline below 400,000 in 2010.

   In the vacuum created by this leadership ineptitude, a climate of political corruption thrives. (Amazingly, the Partnership even at one point crowed about its leader Fred Nance being “Fred the Fixer”. They were oblivious to the pejorative connotations of the term.) This reputation will be very difficult to rub out. Sadly, people avoid a corrupt city like a bad restaurant.

   The dynamic will change inevitably. The only question is the pace of change in Cleveland and how far Cleveland must shrink –- how many assets will be lost (libraries? the symphony?)– before the dynamic shifts and Cleveland begins to build a new base of wealth. My brother argues that Cleveland is not yet ready for a turn around. It has “not died enough”, he says.

   Perhaps.

   People who care about the city can speed the transition by building new patterns of civic behavior that support people thinking in groups. This new leadership will embrace a different set values more aligned with economic realities of today’s wealth creation: mutual respect; reciprocity; shared responsibility; transparency. The faster people reject the old ways of leading Cleveland and begin building Cleveland’s new civic space, the faster the city’s recovery will emerge.

7. Douglas Craver Says:
   July 27th, 2009 at 5:31 pm

   The problem is Cleveland’s #1 industry is non-profits. We’re even seeing played out in terms of recent real estate announcements.

   The problem with that is non-profits reduce the corporate tax base. As long as Cleveland continues to institutionalize problems through non-profits which continue to get more bureaucratic, it will be very difficult to pull the region up.

8. Ed Morrison Says:
   July 29th, 2009 at 1:33 pm

   The non-profits exist because the industrial wealth of Cleveland — started with entrepreneurs two generations ago — was so successful.

   Cleveland has yet to create a new base of wealth, so we will see these non-profits struggle in the years ahead.

   Real estate development does not create sustainable wealth, yet, that’s where Cleveland’s leadership has focused since the early 1980’s. Done right, real estate development simply creates a stage set for entrepreneurs and innovative companies.

   At the same time, the economic model of wealth create has shifted from hierarchies (pioneered by companies like DuPont and GM, see The Visible Hand by Chandler) to networks.

   Networks, as an engine of wealth creation value transparency and speed. Open innovation — such as P&G’s Connect and Develop strategy — represents one generic type of business model that capitalizes on these open networks.

   Open networks create new imperatives for economic development organizations. Open Source Economic Development, developed at Purdue University, focuses on how cities, regions and other important organizations — like schools, universities and foundations — can support wealth creation in these open networks.

   Based on my interactions with our foundations, the GCP and others, Cleveland’s non-profits have little understanding of these new dynamics.

   They can learn more. My suggestions: Attend the new certificate course in Open Source Economic Development that we are offering in November. It’s a couple of three day intensive sessions, plus some e-learning.

   Anyone interested can connect with Peggy Hosea at Purdue: phosea@purdue.edu.