In The Innovator's Dilemma, the late Clayton Christensen described how great companies can fail by "doing everything right." Facing a new technology or disruptive competitor, such companies follow a series of logical steps that lead to their demise:
- They focus on the needs of their current best customers;
- They double down on activities that currently generate profits;
- They take into account the (sunk) costs that underpin their existing product, which makes any change seem like a terrible waste; and
- They avoid any drastic changes for fear of failure.
By focusing on their current best customers, leading companies fail to notice a growing group of non-customers (or low-end customers) that have different needs. By doubling down on activities that generate profits today, they fail to develop capabilities and products that will make money tomorrow. By focusing on sunk costs of the current system, they obscure the even higher cost of keeping things as they are. And by trying to avoid failure, they lose their chance to remain successful.
Christensen's work focuses on companies, but it also applies to cities. Cities are facing a disruptive competitor — each other. Over the past couple of years, many of the world's highest-paid employees realized they could work from anywhere. As a result, cities and office landlords can no longer take their best customers for granted. They must fight to attract these people. They need to keep their residents and tenants and convince new ones to move in.
As cities and landlords try to adapt, they face their own version of the Innovator's Dilemma. A recent tweet from Jessie Singer provides an example of what this means in practice:
City officials and office landlords want New York City to recover and become more attractive. To do that, long term, NYC must become more walkable and de-prioritize private cars. But many office landlords oppose anti-car measures due to the short-term need to encourage more people to drive back to the office. In this example, Vornado, New York's second-largest office landlord and second-largest street retail landlord, was lobbying for the cancellation of a new bus lane along 5th Avenue. The landlord preferred to keep more of the street available for private cars.
Another example arrived yesterday:
People aren't coming to the office. Should the landlord focus on flexibility, walkability, well-being, and sustainability? Nah. Let's just throw in a Porsche. Instead of responding to the actual threat of remote and flexible work, the landlord is doing exactly what Christensen predicted: Trying to escape up-market, focusing on the (diminishing number) of customers who want bigger, fancier offices with more marble, expensive lobbies, and access to a fancy car.
It might actually work for this building. In a city as big as New York, a few tenants might sign up and fill a few floors. But, for the office market as a whole, this approach would fail. And it will take the city down with it.
To survive, cities will need to do the opposite of what their instincts (and landlords) tell them to do:
- To focus on the needs of people who aren't currently their best customers: The people who aren't coming to the office and the people who can't (yet) afford to live in the city (but might move to it if more apartments become available, safety increases, and public schools improve) ;
- To move away from activities that currently generate profits (huge offices, millions of car-based commuters) and towards new activities that will make cities attractive over the coming decades (more housing, mixed-use neighborhoods, superior public transport, walkability);
- To ignore the sunk costs that underpin "things as they are" and rethink what the city can and should be; and
- To embrace radical change and new ideas.
Facing disruption, the riskiest thing you can do is stay the same. It's true for companies, and it's equally true for cities and the buildings within them.