Cities, companies, and innovation – The crucial interplay

Over the past few weeks, I’ve been pondering over the observations of Geoffrey West and his team. In their cross-disciplinary research on complex adaptive systems, they looked for common underlying principles that could be applicable to biological systems and social systems alike: What do animals and plants, companies and cities have in common?

West’s key findings

In this quest for universal principles West investigated scaling, i.e., he wanted to answer the question: What happens to system parameters when a complex adaptive system increases size? It’s no big wonder that he found two different types of scaling. One is what he called sublinear scaling: for a system of double size, the parameter increases by less than 100%. The other type is called superlinear scaling: for a system twice the size, the parameter increases by more than 100%. What is truly surprising however is the distribution of these two types over different types of systems and different system parameters.

Sublinear scaling is found across biological systems, in plants and animals. This type of scaling paraphrases economies of scale in the use of energy and resources: being bigger leads to a relative decrease in consumption. And that is what makes size advantageous and sustainable. Growth for these systems is sigmoidal, which implies that growth is finite: after a period of fast growth early in life, growth gradually slows down over time, coming to a full stop and finally leading to the death of the organism. In social systems, sublinear scaling occurs in companies; they follow a sigmoidal growth pattern similar to that of biological organisms, ultimately leading to the death of the organisation. Cities, however, are different. Their infrastructures do show sublinear scaling, i.e., they follow economies of scale; regarding the resource investment in infrastructure, bigger cities are more affordable and sustainable per capita than smaller cities. But unlike biological organisms, cities don’t die.

So there must be something special about cities, some additional mechanism at work. And that is superlinear scaling. This is not found in biological systems; it has no biological analog. And it is not found in companies either. Superlinear scaling is a unique feature of cities, and it is the underling reason for their abilitiy to enhance the density, frequency, intensity of all human interactions. I won’t hide that this has serious downsides, if you think about crime, disease or pollution (clearly a topic for a subsequent post). Still, these negative effects are outweighed by superlinear scaling in areas such as wealth creation, productivity, and (sic!) innovation. That’s what makes cities attractive: they provide the forum for people to exchange ideas fast, easily, and widely, and to generate new ideas, unconventional and even crazy. Cities provide the conditions for ideas to meet and mate. Now, what does that tell us about innovation and the interplay between cities and companies?

What West’s findings mean for innovation

In West’s conceptual framework, sublinear scaling is a reflection of economies of scale, whereas superlinear scaling reflects wealth creation and innovation. But it would be a stretch too far to simply conclude that companies (with their sublinear scaling) play no role in innovation at all, whereas only cities matter for innovation, due to the superlinear scaling that is unique to them. On the other hand, the traditional wisdom that sees companies as the bedrock of all innovation is equally flawed. It’s not a question of either companies or cities; rather, it’s a question of balance: How do companies, how do cities contribute to society’s innovation capacity?

One possible lens for having a closer look is through different types of innovation. As a starting point, I’d suggest Clayton Christensen’s categorisation into disruptive, sustaining, and efficiency innovationdisruptive innovation that creates a game-changing product to expand or even transform the market; sustaining innovation that replaces a product to grow market share; efficiency innovation that drives production cost down to increase profit within existing market share.

These categories clearly emphasize the economic dimension of innovation, hence we can easily relate them to the role of companies. It’s no surprise that companies are usually very active in sustaining and efficiency innovation: sustaining innovation is intended to grow market share in the medium term, whereas efficiency innovation seeks to cut production cost in the shorter term. That is what happens within established companies pursuing their business purpose: making profit. However, disruptive innovation is a totally different game. As Christensen pointed out, the disruption of business models and entire market segments usually is not triggered by the current market incumbents, i.e., this is not the domain of established companies. Rather, disruption is brought about by new market entrants, by challengers. Disruptive innovation is promoted by external forces. At least from the perspective of established companies.

When you broaden that perspective to include the urban environments, which companies are embedded in, the role of cities in innovation comes to the fore. Cities are the ideal breeding ground for new ideas – unconventional, challenging, even crazy ideas how to solve society’s problems. Cities are the place to expose own ideas, to be stimulated by others’ ideas, and to mature ideas to the point where the abstract idea could potentially be turned into a concrete reality. Furthermore, the density of human encounters – both planned and accidental – make cities the perfect forum to garner the resources necessary to pursue an idea further and to implement a novel problem solution. For the most promising of such innovations, for those with the highest potential impact and highest potential return on investment, the next logical step is to create a company to implement the innovation. From a societal perspective, this company acts as the management framework to focus the aggregated resources on the successful implementation of that novel problem solution. But for the established companies, this new market entrant with the unconventional idea and the promising business model is then easily perceived as an external disruption.

The crucial interplay

There is no point in discussing which is more important; whether cities or companies make the greater contributions to delivering the innovation society needs to get its problems solved: both play critical roles, and both must contribute their specific strengths. Cities provide the stimulating environment for the generation of ideas and the identification of novel problem solutions, while companies act as the management framework to efficiently implement those solutions. Both contributions are indispensable, despite our usual focus on business, which tends to portray companies as the sole source of innovation. Geoffrey West reminds us that urban environments are an important origin of innovation, one that we often ignore, or at least underestimate. He pushes us to adopt a better balanced view.

If you imagine an innovation supply chain, you can see cities located near the beginning of that chain: unearthing the raw material, refining and upgrading it. Companies on the other hand are situated closer to the end of the chain, at the integration of components and the final deliver to the customer. Of course there is significant overlap between cities and companies, but I hope this image helps to emphasise why we depend on both aspects: A city is a good place to launch an innovation, and a company is the good tool to land it. Ignoring either of them will yield only partial success, if any.

With these considerations, we have the main elements for the narrative how innovation critically depends on the interaction between society and business, between urban social environments (i.e., cities) and companies. I’ll try to condense that storyline in an upcoming post.



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