City planet Business Trends 2014

Overview

Cities feature as a key dimension of many companies’ strategies to serve the world’s new consumers. The ever-increasing urbanization of our planet constitutes, after all, one of the biggest trends in the history of civilization. Most strategies have considered cities as places richly packed with consumers, closely considering the particular needs and desires of urban dwellers and the logistical challenges of serving them. These questions have become more pressing as companies continue to look to emerging economies for growth; the current migration from rural areas to cities in China and India and across the developing world is unprecedented in its scale and speed.

But the emerging trend we are seeing is that companies are going beyond thinking of cities only as consumer capitals and beyond engaging with them only through their marketing strategy. Some are also developing more holistic city strategies, within which consumer marketing is just one component. Cities are also being recognized as hotbeds of talent, crucibles of innovation, and centers of society and culture—as cauldrons of society’s most pressing problems and seekers of solutions in and of themselves. It requires a sophisticated and multi-dimensional strategy to engage with all of this, and to realize the full value that urbanization offers to a business.

Adopting a more integrative, strategic approach to cities is especially important because the urbanization of the developing world is an intensely disruptive and dynamic process. Not only are newly important cities springing up at a speed never seen in the West, they are doing so with much greater self-awareness. Today’s civic leaders, wherever they are, have the benefit of decades of study of urbanization and its impacts. Many of them have well-informed views of the roles corporations have played, and can play, in their growth. As their powers—and problems—grow, they are looking for similar thoughtfulness from business leaders.

What’s behind this trend?

Business and cities have gone hand in hand since the beginning of trade. Commerce helped give rise to cities, and industrialization has accelerated their growth. As centers of economic power, they act as magnets for the most enterprising among us. (Almost two-thirds of college graduates aged 25–34 in the 2010 US census stated that they decided where to live before they sought employment opportunities in their city of choice.¹) Across the mature economies of the West, urbanization is a well-established phenomenon; even before the year 1950, more than half their populations lived in metropolitan areas.²

Innovation of all kinds now flows quickly from city to city, facilitated by growing networks of innovators, city managers, and corporate players.

More recently, what was already true of developed economies became true of the world. In 2009, the turning point occurred—more than half the Earth’s human population now lives in urban areas³—and we truly became a “city planet.” The change reflects the massive shifts underway in China, India, and other emerging economies, where urbanization has occurred at a breathtaking pace in recent decades. In 1950, less than 18 percent of the population of emerging economies lived in cities; today, almost half do.⁴ Between 1980 and 2010, Asia added more than a billion people to its urban population, with another billion set to join city life by 2040.⁵ By 2050, it is estimated that 2.6 billion more people globally will have become urban dwellers—almost all of them in the emerging economies.⁶ This massive movement of workers to increasingly productive cities has been a fundamental ingredient of the global rebalancing of economic power.

With the rise of cities has also come the rise of powerful city leaders, often at least as pragmatic and capable of action as politicians at the national level. Cities are driving new demands for solutions in areas such as in education and health care and providing the conditions for innovation in how they are designed and delivered. As they put new pressures on infrastructure and sustainability, they are the laboratories for the development of the smart new approaches required in housing, energy, water, and transportation. Their growing power has made them important influencers of a new regulatory environment that features challenging divergence and specificity based on local circumstances—and at the same time, some surprising convergences through alliances and the rapid sharing of best practices.

Innovation of all kinds now flows quickly from city to city, facilitated by growing networks of innovators, city managers, and corporate players. Cape Town in South Africa, for example, recently adopted an approach developed by the City of York in the United Kingdom for effectively “crowdsourcing” solutions to citywide problems. One of the designers of the York model said, “We immediately recognized the parallel between Cape Town’s desire to develop an ‘innovation ecosystem’ between the business community, residents, and city administration and our very own initiative.”⁷ In 2013, a New York-based think tank unveiled 15 policy solutions, developed in cities around the world that could benefit New York.⁸

City leaders are also much more aware of the knock-on effects of urbanization, which have been thoroughly studied. Many of these are positive. For example, women’s roles in families and communities are often fundamentally transformed when they leave rural areas for urban centers. They have far fewer children on average, and by gaining economic remuneration for their work, gain new standing. This partly explains why female earnings have grown twice as fast as male earnings in BRIC economies since 2007.⁹ Women in emerging economies also increasingly resemble their developed-economy counterparts as buyers: They now control two-thirds of consumer spending decisions. Urbanization has also changed the gender breakdown of educational achievement. The majority of tertiary degrees in BRIC countries now go to women.¹⁰ Aspirations reflect this momentum: Women employees of large companies in Brazil, China, and India are more than twice as likely as women in the United States to aspire to “the top job.”¹¹

Many city leaders have promoted the dynamism of their regional economies by explicitly setting out to encourage entrepreneurial activity and the development of industry “clusters” (sectors of many players collectively building specialized capabilities). Singapore, for example, has successfully become home to Asia’s fastest-growing bio-cluster, presenting opportunities for new arrivals to partner with research institutes, corporate labs, and public hospitals to develop new medicines and future therapies. Already, more than 30 of the world’s leading biomedical sciences companies (including GlaxoSmithKline, Novartis, and Takeda) are leveraging Singapore and its dynamic networks to drive innovation.¹² Beijing, Shanghai, and Shenzhen/Guangdong are also specifically targeting biotech, and have dedicated parks to house and incubate more than 5,000 smaller enterprises, supported by tax incentives and close links to publicly funded academic research.¹³ While connective technologies have diminished the importance of physical proximity in many ways, the “cluster effect” still matters greatly for innovation and research.

Such developments have influenced how globalizing companies think about cities, too—especially in emerging economies. Many first saw them as sources of cheap labor. Later, multinational consumer goods companies began seeing them as markets. Now they see them as sources of innovation and talent. Take Xerox, for example. In 2010 it launched an ambitious “Innovation Hub” in Chennai, India. The “hub” in the name reflects the notion that Chennai can be central to an open innovation system which accesses talent from many other points around India, including the Indian Institute of Technology in Madras and the Indian Institute of Science in Bangalore.¹⁴

For some companies, cities are now seen as customers in their own right. They are the centers of some of the most challenging economic, environmental, and social issues in the world today—and their leaders demonstrate growing commitment to the use of technology and innovative policy to address these issues. Global corporations, local businesses, and municipalities are partnering to deliver innovative, integrated solutions to problems endemic in many cities—crime, environmental decay, pollution, congestion, and inequality. Business has a vital role to play, and the rewards for smart participation in the “city planet” are vast.

Implications

With the growing and increasingly multifaceted importance of cities, some companies have been rethinking their approaches, and starting to connect all the dots into comprehensive city strategies. Deloitte’s Globalization Survey 2013 revealed that around 50 percent of companies already develop customized strategies for specific cities.¹⁵

As this more systemic approach evolves, it is likely to typically include several important dimensions. The first is the choice of cities to target, both for market scale and the sequencing of expansion. Second is where—and how best—to grow and tap into networks that support innovation. And finally, organizations should consider how to design a portfolio of city-based experiments that will accelerate learning to be applied beyond urban areas.

Where to play?

Firms are making their prioritization decisions based on an increasingly sophisticated taxonomy of factors: density, size, shared cultural characteristics, cluster effects, specializations, and the established power of locally based competitors. Certainly the world’s highest-profile cities, still mainly in developed markets, will continue to be prominent in multinationals’ portfolios. In a recent ranking of globally competitive cities, New York and London ranked highest, and cities from the United States and Western Europe accounted for 24 of the top 30 places. They are hard to beat in terms of their institutional effectiveness, their social and cultural character, and their ability to attract talent.¹⁶

But global firms will also continue to focus on the “megacities” of emerging markets. Much attention has been devoted to these urban agglomerations of more than 10 million people (all but four are located outside of developed economies). This is justified: Places like Kolkata, Lagos, Rio de Janeiro, and Shenzhen are breeding grounds of change and growth in the world today, and their numbers are set to rise from 23 today to more than 37 by 2025.¹⁷

For forward-looking companies, it is important, too, to strategize about the next tier of cities—the fastest-growing urban environments that make sense for businesses to operate in. Collectively, the megacities account today for less than 10 percent of global city-dwellers, while more than 60 percent live in cities with populations of less than 1 million.¹⁸ These smaller cities are proliferating and growing in importance. According to some forecasts, companies that want to touch 80 percent of the middle class in China will have to play in more than three times as many cities by 2020 as was required in 2005.¹⁹ For example, Walmart is looking far beyond the biggest cities. As reported by Bloomberg BusinessWeek in the fall of 2013, Walmart plans to open 110 stores during the next three years in Chinese third- and fourth-tier cities.²⁰

Connecting with networks

Cities also provide companies the opportunity to engage with rich networks for regionally and globally relevant innovation and learning. A growing number of cities are bases of distinctive ecosystems fueled by local institutions, infrastructure, culture, and government. These are not always intentionally designed as formal clusters, but are the result of unique combinations of past decisions, present capabilities, and local needs.

For example, like Silicon Valley before it, Bangalore emerged as India’s dominant IT ecosystem, when entrepreneurial outsourcing providers took root there and attracted others. Wipro, Tata Consulting Services, and the start-up Infosys were early business settlers in the city, and Texas Instruments the first foreign technology company to establish a strong research-oriented presence.²¹ By 2000, Bangalore was sufficiently established, with distinctive networks of venture capitalists, incubators, and local universities for General Electric to choose it as the home for its John F. Welch Technology Center—the company’s “largest integrated multidisciplinary research and development center, and the first to be located outside the United States.”²²

Cities also provide companies the opportunity to engage with rich networks for regionally and globally relevant innovation and learning.

Elsewhere, powerful economic networks are being generated primarily from servicing particular local needs. For example, in Brazil, the consumption capacity rise from emerging classes and economic growth over the last decade has fueled demand for mobile services. The Latin American region’s mobile market is dominated by Brazil, with 112.5 million unique subscribers by mid-2013, accounting for over a third of the mobile users in the Latin American region as a whole.²³ The networks that have emerged through this need for wireless services have spurred innovation and new business models—today, Brazil is already a global leader in providing m-health and m-education services.²⁴

Experimentation and learning

As companies engage with more cities, it will make sense to conduct pilots to refine approaches that will serve them in many other locales (understanding, of course, that variations will always exist and need to be accommodated). For example, South Africa’s Standard Bank launched a remarkably successful banking service for low-income customers living in its own country’s largest urban areas. It offered a secure and affordable cellphone-based banking program, and reaped the rewards as customers opened 90,000 new accounts a month. But its approach was not just to offer an affordable technology to customers. It also recruited city residents to create a network of mobile sales consultants, recruiting mainly from the ranks of the unemployed, providing training, and supporting them to sell the accounts back in their communities. This multifaceted engagement with urban energy and talent proved so successful that Standard Bank is replicating it in cities in Kenya and Nigeria, and plans to do so in other countries later.²⁵

Other companies are using urban centers (mostly in emerging markets) as living laboratories to develop, launch, and test products and services, build new channels, design new business models, attract new talent, create new partnerships, and learn to adapt to new challenges—cultural, infrastructural, and regulatory. The smartest of them are embracing discovery—and learning-oriented approaches more usually associated with science or innovation; they are establishing hypotheses, designing, and running low-cost experiments, learning fast from failures (and successes), and repeating and scaling what works. Given the variability, unfamiliarity, and dynamism of the growing number of urban centers that matter, this exploration and experimentation-based approach is sure to become increasingly important across multiple dimensions of the city strategies of many corporations.

Looking ahead

As businesses focus more on cities and cities look more to businesses for solutions we can expect to see much more in the way of public-private partnerships to address social ills.

Consider the experience of the city of Medellín in Colombia, which has used its investment in transportation infrastructure as a key lever to change a city of violence and despair into one of opportunity and hope. This resulted in the homicide rate plunging nearly 80 percent between 1991 and 2010.²⁶ Medellín metro cable system, for example, has revolutionized mobility and accessibility for residents of the poorest—and often most violent—communities that line the valley of Medellín’s mountainous region. Residents enjoy new parks, schools, hospitals, and police services—many integrated into the infrastructure of the metro system itself. Accessibility to the mountainside communities has also infused a new stream of commerce, services, and tourism to the favelas.²⁷

Transport challenges are also inspiring new models of mobility such as Skybus in Lavasa, India.²⁸ Challenges of food quality and security might be met by investment in “vertical farming,” while city-based skills and employment concerns could be alleviated by urban-based tool-sharing centers and communities like Tech Shop.²⁹

It is not only in the emerging economies that cities are using technology to address issues of mobility, energy use, and sustainability. Amsterdam is working with corporate partners to help residents reduce energy costs and curtail greenhouse gases. Projects under the wide-ranging initiative have included chargers for electric cars, advanced residential electric meters, networks that connect home appliances to an energy management system, and a “climate street” that links tram stops and street and store lighting with meters to reduce energy use along a crowded shopping route.³⁰ The city of Seoul’s government has introduced smart meters for home, office, and factory owners. The aim is to reduce the city’s total energy use by 10 percent.³¹ New York City is building innovative and sustainable access points to electricity through the development of Street Charge, a free solar mobile charging station. Telecom provider AT&T has partnered with portable solar power systems developer Goal Zero and Brooklyn design studio Pensa for the roll-out of Street Charge public solar charging stations in New York.³²

In both the well-established, relatively stable cities of developed economies and the dynamic, fast-growing cities of emerging economies, we are sure to see far more use of technology and partnerships to help in a wide range of innovations directed at critical infrastructure and quality of life. Those businesses that commit to participating in such activities will weave themselves into the essential fabric of the future.

My take

By Enrique Peñalosa, former mayor of Bogotá, Colombia

If New York, Paris, or London could erase half of themselves to rebuild anew, quite a few things would be done differently the second time around. These megacities have embedded infrastructures that handicap them in some ways.

Many of the cities in developing countries are relatively young. With fewer infrastructures, there is more flexibility to design the city to support the outcomes that people seem most deeply engineered to seek—happiness and well-being. So these youthful cities have a historic opportunity to organize themselves based on lessons learned from the successes and failures of their older siblings. They will flourish by understanding that well-designed cities provide a form of direct compensation to people that is often just as important to them as the size of the salary they draw from a job.

In the next 60 years, there will be three to four times more square meters of cities across the globe than currently exist. The tone of that development will certainly be influenced by the United States, which will build more than 70 million new homes over the next 40 to 50 years (this is more than the number of homes that currently exist in France, Britain, and Canada put together). But it will be more powerfully shaped by urban development preferences in developing countries. The population of India, for example, is currently 33 percent urban but will likely become 80 percent urban over the next 50 to 60 years. These startling projections suggest that we are amidst a phase-shift.

When we design cities, we design a way of life. Cities in developing countries are migrating from an era in which much of the services delivered by them were survival-based—the delivery of food, sanitation, and shelter—to a phase in which survival is largely guaranteed. Therefore, cities are aiming higher. The next phase of urban development will emphasize who we want to become, rather than what we must do to endure.

When cities are at their best, they foster a protective, beautiful, inclusive, and stimulating way of life. They serve as learning laboratories, magnifying the flow of ideas through which people exchange perspectives and compare values. They enable human contact, which allows rich flows of information that cannot be substituted with emails or text messages. Cities are entering an era which may become known as a kind of golden age, and the best urban environments will unlock the best in human nature and potential.

The bottom line

Cities, with their dense and diverse populations, feature commingling and interaction of talent and offer access to many perspectives. They have given rise to civilizations, enabled specialization, created markets, spread opportunities, generated economic growth, produced entrepreneurs, sparked innovation—and have thereby driven human progress and improved lifestyles and standards of living.

Companies are learning to approach cities as more than simply reliable sources of market expansion, instead thinking of them as vital talent centers, innovation hubs, learning laboratories, and “proving grounds” for solutions to some of the world’s toughest problems. Their leaders have noted the phenomenon of urbanization, realized that it is a massive trend reshaping the business environment, and recognized that cities are far too complex to be addressed by any simplistic, one-dimensional approach.

As part of their “city strategies,” companies must figure out when, where, and how to insert themselves into dynamic and rapidly evolving city networks of relevance to their business. Many will need to extend their reach well beyond the megacities of the world into second- and third-tier cities. Those who engage with urban centers with a mindset of constant learning, exploration, and engagement will discover the strategies that work and that can be replicated elsewhere. The very best of them will commit to participate as full partners in an era of remarkable city-based innovation, challenge, and change.