Innovation REALLY Matters – Lessons Learned from Detroit

Innovation REALLY Matters - Lessons Learned from DetroitForbes republished its annual “Most Miserable Cities” list. It looks at employment/unemployment, inflation, incomes and cost of living, crime, weather, commute times – a pretty good overview of things tied to living somewhere. Detroit ranked first, as the most miserable city, with Flint, MI second. And my home-sweet-home Chicago came in fourth. Ouch!

There is an important lesson here for every city – and for our country.

Detroit was a thriving city during the industrial revolution. Innovation in all things mechanical led to the modern automobile; a marvelous innovation which, literally, everyone wanted. As demand skyrocketed, Henry Ford’s management team developed the modern assembly line which allowed production volumes to skyrocket as well. Detroit was a hotbed of industrial innovation.

This fueled growth in jobs, which led to massive immigration to Detroit. With growth the tax base expanded, and quickly Detroit was a leading city with all the best things people could want. In the 1950s and 1960s Detroit reaped the benefits of the local auto companies, and their suppliers, as ongoing innovations drove better cars, more sales, more revenue taxes, higher property values and higher property taxes. It was a glorious virtuous circle.

But things changed.

Offshore competitors came into the market creating different kinds of autos appealing to different customers. Initially they had lower costs, and less expensive designs. Their cars weren’t as good as GM, Ford or Chrysler – but they were cheap. And when gasoline prices took off in the 1970s people suddenly realized these cars were also more fuel efficient and cheaper to maintain. As these offshore competitors gained more sales they invested in making better cars, until they had quality as good as the Detroit companies, plus better fuel efficiency.

But the Detroit companies had become stuck in their processes that worked in earlier days. Even though the market shifted, they didn’t. What passed for innovations were increasingly simple appearance changes as bottom-line focus reduced willingness to do new things, and offered fewer new things to do.  GM and its brethren didn’t shift with the market, and by the 1980s the seeds of big problems already were showing. By the 1990s profits were increasingly variable and elusive.

The formerly weak and small competitors now were more competitive in a changed market favoring smaller cars with more, and better, technology. The market had changed, but the big American auto companies had not. They kept doing more of the same – hopefully better, faster and striving for cheaper. But they were falling further behind. By the 2000s decade failure had become the viable option, with both Chrysler and GM going bankrupt.

As this cycle played out, the impact on Detroit was clear. Less success in the business base meant fewer revenue tax dollars from less profitable companies. Cost reductions meant employment stagnated, then started falling.  Incomes stagnated, and people left Detroit to find better paying jobs. Property values began to fall.  Income and property taxes declined. Governments had to borrow more, and cut costs, leading to declines in services. What had been a virtuous circle became a violently destructive whirlpool.

Detroit’s business leaders failed to invest in programs to drive more new jobs in non-auto, non-industrial, business development. As competitors hurt the local industry, Detroit (and Michigan’s) leaders kept trying to invest in saving the historical business, while the economy was shifting from an industrial base to an information one.  It wasn’t just autos that were less valuable as companies, but everything industrial. Yet, leaders failed at attracting new technology companies. The economic shift – the market shift – was unaddressed, and now Detroit is bankrupt.

Innovation REALLY Matters - Lessons Learned from Detroit

Much as I like living in Chicago, unfortunately the story is far too similar in my town. Long an industrial hub, Chicago (and Illinois) enjoyed the benefits of growing companies, employment and taxes during the heyday of industrialism. This led to well paid, and very well pensioned, government employees providing services. The suburbs around Chicago exploded as people migrated to the Windy City for jobs – despite the brutal winters.

But Chicago has been dramatically affected by the shift to an information economy. The old machine shops, tool and dye makers and myriad parts manufacturers were decimated as that work often went offshore to cheaper manufacturers. Large manufacturers like Western Electric and International Harvester (renamed Navistar) failed. Big retailers like Montgomery Wards disappeared, and even Sears has diminished to a ghost of its former self. All businesses killed by market shifts.

And as a result, people quit moving to Chicago – and actually started leaving. There are now fewer jobs in Illinois than in the year 2000, and as a result people have left town. They’ve gone to cities (and states) where they could find jobs in growth industries allowing for more opportunity, and rising incomes.

Just like Detroit, Chicago shows early signs of big problems. Crime is up, with an unpleasantly large increase in murders.  Insufficient income and property tax revenues led to budget crises across the board. Dramatic actions like selling city parking meters to shore up finances has led to Chicago having the most expensive parking in the country – despite far from the highest incomes. Property taxes in suburbs have escalated, with taxes in collar Lake county higher than Los Angeles! Yet the state pension system is bankrupt, causing the legislature to put in place a 50% state income tax increase! Meanwhile the infrastructure is showing signs of needing desperate work, but there is no money.

Like Detroit, Chicago’s businesses (and governments) have invested insufficiently in innovation. Recent Chicago Tribune columns on local consumer goods behemoth Kraft emphasized (and typified) the lack of new product development and stalled revenue growth. Where Bay Area tech companies expect 50% of revenues (or more) from new products (or variations), Kraft has admitted it has relied on stalwarts like Velveeta and Mac & Cheese so much that fewer than 10% of revenues come from anything new.

Culturally, too many decisions in the executive suites of both the companies, and the governments, are focused on what worked in the past rather than investing in innovation. Even though the vaunted University of Illinois has one of the world’s top 5 engineering schools, the majority of graduates find they leave the state for better paying jobs. And a dearth of angel or venture funding means that start-ups simply are forced coastal if they hope to succeed.

And this reaches to our national policies as well. Plenty of arguments abound for cutting costs – but are we effectively investing in innovation? Do our tax policies, as well as our expenditures, drive innovation – or constrict it? It was government programs which unleashed nuclear power and gave us a rash of innovations from putting a man on the moon. Yet, today, we seem obsessed with cutting budgets, cutting costs and doing less – not even more – of the same.

Growth is a wonderful thing. But growth does not happen without investment in innovation. When companies, or industries, stop investing in innovation growth slows – and eventually stops. Communities, states and even nations cannot thrive unless there is a robust program of investing for, and implementing, innovation.

With innovation you create renewal. Without it you create Detroit.

image credit: demounderground & atlasis
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Adam HartungAdam Hartung, author of Create Marketplace Disruption, is a Faculty and Board member of the Lake Forest Graduate School of Management, Managing Partner of Spark Partners, and writes for Forbes and the Journal for Innovation Science.

Adam Hartung




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No Comments

  1. Peter Hill on February 28, 2013 at 12:37 pm

    Where do I start??? First of all the comparison of Detroit and Chicago that leads to writer the conclusion that our federal government isn’t spending enough is beyond absurd. It certainly sounds good if you happen to believe that the government is epicenter of innovation and all things good. Unfortunately they are not. To answer your question “Do our tax policies, as well as our expenditures, drive innovation – or constrict it? The answer is we constrict it by limiting competition through regulation and taxation. If you want innovation, the last place you want to be is in a government building somewhere. The government innovates nothing. The companies the federal government chooses to support has nothing to do with innovation and everything to do with campaign contributions. It is sad but a reality we must acknowledge. Innovation comes from the marketplace. If you want more of it, get more players in the marketplace and get the government OUT of the marketplace. More competition equals more innovation. The consumer wins. Detroit and Chicago have lost and are loosing employers and employees because of the cost of doing business and the cost of living. Local governments have successfully run them off. More government equals less innovation. The government has a pretty good record of not picking winners and losers, but just picking losers. I think the article should be pointed squarely at business innovation. Let the government protect us from evil and create a healthy business environment. (which means lower taxes) Don’t get me started about government pensions and government employee unions.

    • MichSeag on February 28, 2013 at 4:04 pm

      You could start with “do editors do any work at FastCompany?”
      Exactly what big problems can seeds show???? Just askin’….

      Or this: “But the Detroit companies had become stuck in their processes that worked in earlier days.”

      Where to start with this sentence…???

      By the way… was it simply a lack of innovation that cost Detroit it’s place as the number one home of car makers on the planet?

      Oh wait….! It still is the number one home of car makers on the planet!

      What has changed then?

      Technology has replaced the 100,000 people that used to work at the River Rouge plant with a mere 1,200….that’s what happened to Detroit! As well, changing trade policies that make for spectacular bottom-line growth for investors has made being a tradesman an anachronism in the United States – a phenomenon felt most acutely in Detroit, Flint, and other industrialized cities.

      Detroit cars are better-made now than ever!!! Their quality and embedded technology is every bit as good as whatever comes out of Yokohama or Toyota City. But that doesn’t account for the massive loss of low-skill-high-wage jobs that powered Detroit, and much of America.

      Overall, American wealth has not lessened over the last 40 years. The distribution of that wealth, and the ability of working-class citizens to leverage a higher standard of living as a result, is what has changed.

      Innovation alone will not stop that!

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