Q & A with Michael Porter
Harvard professor and urban booster Michael Porter explains the vital role that growing companies play in the inner city.
Published May 2004
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COMMENT ON THIS ARTICLEMichael Porter has been studying the inner city for a decade. What started as research into business opportunities in blighted neighborhoods has become a nonprofit organization, the Initiative for a Competitive Inner City, and an annual ranking of the fastest-growing private companies in those areas, which is published in Inc. magazine. Porter recently spoke with senior editor Mike Hofman to outline what he has learned from the project.
What do you hope to accomplish by ranking a hundred companies that are growing fast and happen to have operations in inner city neighborhoods?
The premise is this: No matter what amount of social intervention we engage in, whatever kind of philanthropy or charity there is, communities can't possibly be healthy unless the economy works. So the focus of the Inner City 100 has been to examine the nature of the business base and the opportunities for success in inner cities.
Why a list rather than another kind of project?
The Inner City 100 was first and foremost an effort to prove that there really were businesses that could thrive in these communities. And through finding these companies and talking about them and writing about them, we hoped to help them. We hoped to give them motivation. We hoped to help them develop better relationships and a better image and more recognition. And we hoped to change perceptions in the wider business community because the typical perception of the inner city is that this is not a good place to do business. We now know that there actually are about 800,000 companies located in the economically distressed areas of the 100 largest cities in the United States. This fact alone is a great surprise to most people. And yes, a lot of the 800,000 companies are small but a significant number of them--80,000 of them--gross greater than a million dollars in annual revenue.
And these companies continue to expand?
Right. They're not just clinging by their toenails. They're not just little mom-and-pops. They're not just bumping along. We've got a lot of high-growth companies in these communities, and they've been able to stay in this growth mode for long periods of time.
Given that only 10% of this year's list were unprofitable, could they be growing even faster?
We don't have any evidence of that. I think that these companies have found very, very profitable segments and niches, in many cases directly related to their inner city location and focus. And they have earned superior returns as a result.
Are these companies financially sophisticated?
I wouldn't characterize them as financially sophisticated. They don't like the idea of giving up control, so conservative is perhaps a good word. In many cases, they don't have big enough sights; they don't necessarily think they could be a $100 million company. And even though capital market activity is springing up around these companies, we find that they don't want equity financing if it means they have to give up control over the business. They are much more interested in subordinated debt. This is a maturity thing. When you're more financially sophisticated you understand that having 75% of a smaller company is kind of silly if you could have 45% of a company that's 10 times bigger, you know? But typically, these entrepreneurs have not come from families that have had entrepreneurs in them, and they have not gotten M.B.A. degrees from Harvard and Wharton. And so I think the big issue that Inner City Ventures, our affiliated investment arm, is struggling with is how to help these companies understand the value of outside capital, of equity capital. We are also trying to create new financial products and vehicles that are responsive to the kind of perceived desires and needs of these companies.
Years ago, you identified four advantages of the inner city: access to labor, transportation, local purchasing power, and urban economic clusters such as the tourism and legal industries. Do these four still top the list?
Well, I think that when we survey all these companies, the top two advantages that they hype are access to transportation systems and the available labor force. On labor, we've actually surveyed the companies, and we find that the average turnover rate is somewhat less than 14%, versus the national average of about 20%. So these companies enjoy a more loyal work force, and they are telling us that that is a big deal.
Given the small number of retailers on the 2004 list, is purchasing power no longer as big a deal as you thought? Or did the success of people like Magic Johnson simply draw a lot of competition into this market?
I think it's harder for retailers to grow at the same rates as business services companies. And we've been in an economic downturn for the last two or three years, so the retail finding could be cyclical. But there's been tremendous retail investment in the inner city over the last five years, based in part on research that ICIC did to quantify the vast purchasing power of inner city America. So it's very likely that what you're saying has some merit to it.
