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OPERATIONS

The Secrets to Their Success
 

Michael E. Porter and Anne Habiby discuss the types of businesses that are thriving in U.S. inner cities.
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FYI: From the editor

In the Inner City 100, we found a new breed of urban business -- companies in the front lines of the new economy.

Editor's note: We are proud to present in this issue the second annual Inner City 100, a ranking of the fastest-growing privately held companies in America's inner cities. As you may recall, it was Harvard professor Michael E. Porter who originally came to us with the idea of doing such a listing. Last year I wrote in this space about the reasons we had found his proposal so exciting. This year I decided to ask Michael and his associate Anne Habiby to step back and reflect on what we've learned since the first Inner City 100 -- particularly with regard to the gap between popular perception and ground-level reality -- about the types of businesses that are leading the revival of our inner cities. --George Gendron, editor-in-chief

When you think of businesses in the inner city, chances are, you may picture old-world manufacturing and service companies -- just the kinds of companies that might be left far behind in the economy as E-commerce continues to furiously ramp up the pace of almost everything. Well, think again.

As the staff members of the Initiative for a Competitive Inner City (ICIC) fanned out across the country to visit this year's Inner City 100 nominees, we found a much different breed of urban business. We were struck by how many of the candidates were in the front lines of the new economy. The companies that made the final cut are an especially impressive group: their average compound annual growth rate from 1994 to 1998 was 50%. The largest concentration of companies on the list (30%) offer commercial services to business customers, providing everything from warehousing and distribution, to equipment rental and repair, to catering. But no matter what they sell, the Inner City 100 all share two keys to success: speed of response and a workforce focused on customer service.

Get It There Yesterday

In the new economy, cutting the time between the ordering and the delivery of goods and services is more crucial than ever. Outsourcing as much as possible is the rule. And inner cities, which are strategically located close to customers and at the hub of regional transportation systems, offer ideal sites for the quick-response manufacturing and services that the new economy demands. Just ask Albert Black, CEO of Dallas-based On-Target Supplies & Logistics (#63), which provides logistics and supply-chain-management services to global corporations like telecommunications-equipment provider Alcatel. Black estimates that his inner-city location creates at least a 30% efficiency advantage over competitors in the suburbs. Integrity Distribution (#39), an office-supplies and furniture distributor based in inner-city Buffalo, can get bulk deliveries to its customers in the Buffalo area the next morning, while its giant competitors usually can't deliver until the next afternoon. It also doesn't hurt that Integrity employs local workers who know, for example, which streets get plowed first during Buffalo's hard winters.

Belkin Components (#30), of Compton, Calif., the largest company on the Inner City 100 list at $152 million in revenues for 1998, also is configured for rapid order turnaround. A manufacturer of computer peripherals and accessories, Belkin, boasts its CEO, Chet Pipkin, can "pick, pack, and ship" in only 30 minutes orders containing thousands of parts being sent to more than 500 locations. And Belkin's proximity to Los Angeles International airport and to the Port of Los Angeles (both 11 miles away) means that the company receives supplies earlier and can ship products more cheaply and with less lead time.

Staffing for the New Economy

The rapid growth of the quick-response manufacturing and service economy is colliding with an extraordinarily tight labor market. Businesses are understaffed, nerves are frayed, and quality service is often the first casualty. So access to the pool of available workers has become a competitive advantage. That pool resides, in large part, in inner cities. Historically, many companies have ignored the workers there, perceiving them to lack necessary job skills. The Inner City 100 CEOs, however, report that by tapping their local workforce and learning how to develop employee talent, they have been able to serve their customers better and fuel their companies' growth.

On-Target CEO Albert Black, for example, employs 70 mostly inner-city residents in his logistics-management business. A product of the inner-city projects himself, he makes what many might consider an excessive investment in employee development: all employees must pursue -- at company expense -- their next highest educational degree in an area with a business focus. Black also encourages his workers to use their experience at On-Target to start independent businesses of their own, serving complementary parts of the market. And 10 former employees have done just that. The result? Motivated workers with business training and an entrepreneurial spirit -- who can think outside the box in solving customers' problems.

At Austin-based Lone Star Direct (#26), CEO Kelsey August has developed a training process for her mostly inner-city workforce that, she claims, develops exemplary customer-service skills. Lone Star, which offers direct-marketing and fulfillment services, has grown by more than 600% in five years while relying mostly on client referrals to bring in new accounts. Unlike competitors of the same size, Lone Star had no sales force until recently, August says. (The company hired a business-development manager in March and began hiring salespeople then.) "We don't go out and seek sales; our clients and our community-service record do that for us," she says.

Entry-level hires at Lone Star receive an extensive written and verbal assessment in technical, mechanical, and communication skills. The assessment is designed to uncover aptitudes that even the employee may not be aware of. A career path is then mapped out for each employee, including extensive training and confidence building. The results are impressive. The four women on Lone Star's executive team, for instance, all started there as part-time production workers.

Lone Star's strategy also means that managers know every part of the business: when the phone rings, they can answer any question. They're inspiring mentors for new staff, and they jump onto the production line at peak times. While competitors are suffering from high levels of turnover (an average of 50% in the industry), Lone Star employees are a loyal group: the company has an employee-retention rate of 80%. In a business defined by customer service, Lone Star has excelled by nurturing an unexpected resource: its inner-city labor force.

With location and labor as competitive advantages, inner-city businesses can not only survive but flourish in today's fast-paced manufacturing and service economy. The commercial-services market, for example, is growing at 6% a year, faster than the rate of the national gross domestic product. It's poised to grow even faster with the explosion of E-commerce fulfillment and the increase in outsourcing. As the Inner City 100 prove, the opportunities are there for the taking.

Michael E. Porter is the C. Roland Christensen Professor of Business Administration at Harvard Business School, a leading authority on competitive strategy, and the founder of the Initiative for a Competitive Inner City. Anne Habiby is the ICIC's director of research and strategy.


Please e-mail your comments to editors@inc.com.

Last updated: May 1, 2000

ANNE HABIBY is the co-CEO and co-founder of AllWorld Network, whose mission is to find and advance growth entrepreneurs in the developing world. She was a co-founder and co-executive director of the Initiative for a Competitive Inner City.




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