Cities, companies, and innovation – An emerging narrative

The work of Geoffrey West and his team is truly fascinating. 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. Of course I’m particularly interested in West’s observations on social systems like cities and companies; and the different roles they play in innovation. Today, I’ll take a deeper look at some of the underlying mechanisms, before I’ll offer a more condensed narrative, a simple storyline about cities, companies, and innovation.

Underlying factors

If you ask me for the main factors that underly the different roles that companies and cities play in innovation, I’d offer three that are intertwined: entrepreneurship, risk management and (de)centralization.

We all know how important entrepreneurship is for successful innovation: the open-mindedness, the adventurous spirit, the drive and dedication, the readiness to take risk, the relentless energy to pursue one’s objective, the unconventional and unconstrained thinking. It’s especially this original thinking at the beginning of the innovation supply chain, this generation of ideas, which thrives on the density and intensity of human interactions. No wonder that cities are the natural environment for entrepreneurship to flourish and bear fruit.

I argue that entrepreneurs make companies, not the other way around. Entrepreneurship leads to the creation of new companies, which then serve as the means, as the organisational construct to implement a novel problem-solution. This process is not driven by or even within established companies; on the contrary, entrepreneurship is actually worn out by companies and eventually expelled from companies. To borrow from Geoffrey West once again:

Cities tolerate crazy people, whereas companies fire the mavericks.

Why should that be? Why can cities live with people who have strange, bizarre, or wild ideas? And why is it that companies cannot? What pushes companies to get rid of such individuals? I think the answer to all those questions is simple: it’s risk management. Think about it in very abstract terms: The more resources are committed, the greater the cost of failure. It’s only logical to minimize that risk and to protect the investment by implementing control mechanisms (reviews, reporting, supervisory boards, etc.).

Transferred to innovation, this means that the further a novel problem-solution is progressing towards successful implementation, i.e., as it moves down the innovation supply chain from idea generation to actual realisation, the more control will be applied to contain the growing potential risk.

• At the beginning of the innovation supply chain (usually situated in urban environments) the concrete resource commitment is small (for example: thinking and talking about ideas): the cost of failure is marginal, the risk is negligible; and therefore, control is not required.
• At the other end of the innovation supply chain (which is the domain of companies), the resource commitment is considerable (for example: technology development programme, building up production capacity): failure would be costly, risk could actually be existential; under these circumstances, control must necessarily be tight.

As a consequence, we find different degrees of (de)centralisation in companies and in cities. Companies centralise control, especially management decisions on budget allocation, work distribution, schedules, etc. They are companies are driven by grand strategies, focused on the one business model they pursue. And companies compete against one another, for the purpose of generating profit; companies always work in a business context.

By comparison, cities are rather unruly places where, within a few baseline principles, everybody can do what he wants. They are decentralised regarding their own decision-making and evolve in rather unstructured ways, without underlying master plans. Cities support the competition of ideas for the purpose of problem-solving, i.e., cities address the broader needs of society, beyond the mere economic focus of companies. In this regard, cities provide the backdrop for the competition between companies, and cities centralise just enough power to ensure a level playing field for business.

Obviously, cities and companies each have their own strengths and weaknesses that can either support or hinder innovation. The orchestration of their respective strengths essentially defines whether society’s innovation needs are met.

An emerging narrative

In order to generate and deliver the innovation required to solve its current and future problems, every society relies on a multifaceted supply chain that covers the entire spectrum from idea generation to the implementation of novel problem-solutions. Cities and companies both are natural actors in this supply chain, they both play vital roles that are intertwined.

In the abstract realm of concepts and ideas, cities are unrivaled in providing free, unconstrained, unregulated spaces that facilitate the generation of crazy, unconventional, disruptive ideas. At the concrete end of the spectrum, companies are exceptionally strong in delivering products, services, solutions to problems, as they apply the necessary control, structure, and discipline to develop, mature and implement novel problem-solutions.

Cities are the substrate for innovation to grow on. They grow the feedstock of crazy ideas that is indispensable at the beginning of the innovation supply chain. And in addition, through the entrepreneurship that is naturally attracted by density of human interactions in urban environments, cities also grow companies. Companies are the tools to nurse innovation and bring it to fruition. They are the organisational shape that we usually employ to aggregate and allocated the resources necessary to pull an innovation through. Companies provide structure, control, and accountability, but they need the input of a constant stream of ideas. These ideas usually originate from the surrounding city environment, but not directly from within a company. From the perspective of cities, the business competition between companies serves as a means to promote the competition of ideas, to facilitate their maturation, and to accelerate the implementation of necessary solutions to current and future problems. This is the underlying innovation narrative that shines through Geoffrey West’s observations.

But the story doesn’t end here …

As I have already indicated earlier, the superlinear scaling in cities is not limited to wealth generation and innovation alone; unfortunately, it extends to crime, pollution, and disease as well. You might say that’s the price to pay; the individual’s exposure to risk increases with city size. But there’s a lot more to the negative effects of city growth:

• Take disease, crime and pollution as root causes of problems for society ;
• Furthermore, consider wealth generation and innovation as drivers for solutions to those problems ;
• Finally, remember what Ian Morris called the Paradox of Development: success breads new problems, their solutions cause yet further problems.

Putting all those jigsaw pieces together, you’ll see that the findings of the historian and archaeologist Morris on social development converge with the observations of theoretical physicist West on cities as complex adaptive systems. But where Morris ends with the observation that social development is a relentless race, West goes one important step further in pointing out that in order to stay in the race, we must keep innovating; and more than that, we must continuously increase the speed of innovation.

In other words: To keep the innovation engine going, we must rev it up. That’s counter-intuitive? Even unsustainable? Certainly it presents a huge challenge into the future. More to follow in the upcoming post …