Franklin & Marshall College Franklin & Marshall College

Eric Pages: President, EntreWorks Consulting

Session: Entrprenuers and Communities in the Global Local Economy

 

Thank you, Antonio, it’s a real pleasure to be here. I want to take just a second to boot up these slides. (Slide 1) As I’m doing this, I have to say, I’m a little bit nervous: first of all, that I’m a professional thinker, it’s an honor, although…let’s just say they don’t pay enough for professional thinkers; the other thing, that I convinced Dave Nikoloff to do anything--I appreciate the honor, but I don’t know if that’s the case. But anyway, thank you very much, it’s a real pleasure to be here, as Antonio said, I have a lot of connections here in this region. I am a Dickinson graduate and it was a great win for us last week against F&M. (audience laughter) It’s a rarity, trust me! I used to play soccer in college; I’d come here twice a year and we’d get our rear ends kicked by F&M, so, I have to get whatever kind of pleasure I can get. And I grew up in Berks County, and I am also one of the lead consultants on the Lancaster Prospers effort; so I have been involved in helping to develop those strategies that people spoke about this morning. I spent a lot of time in Lancaster in the last couple of years, and it’s been great. So, again, thank you for the opportunity to be here with you.

What I’m going to do today is to give you a picture of the Lancaster economy from two angles. One from 20,000 feet, as it were, where we can really talk about how structural changes in the economy are going to hit us on the ground here in Lancaster and central Pennsylvania. These are effects created by what we call the real new economy. Then I want to talk about what this is going to mean for the region--and the bottom line is that this new economy, or whatever we want to call this economy, is going to place a premium on innovation, talent, and speed. These are going to be some of the most important things. Now, Lancaster was very well situated to prosper in the 20th century. Is it well situated to prosper in the 21st century? This is the question with which I want to conclude. I think that you’ve got a lot of assets, but you also have a lot of challenges. I want to lay out that picture for you a little bit, but I would also say that, to your credit, the community’s leaders are trying to do something about it. They recognize these challenges and are acting upon them. I work all over the United States--actually, I work all over the world. Most communities are far behind you both in terms of the local assets you have, and also the commitment and the skill and talent of your leadership, in terms of moving ahead to prepare for this new economy, or even the economy we are in now. And finally I want to talk about where the agenda of the Lancaster Prospers Initiative (LPI) fits in here, because I think the LPI is really tied well to these larger structural changes that are occurring in the economy. So, here we go!.

You know, if you read the business pages today, oftentimes we laugh about the old new economy. We think about the dot coms and the stock market, and all that kind of crazy stuff that we associate with Enron, and all the fraud that occurred with those types of companies. A lot of people say: well, that was kind of a very exciting time, but that’s yesterday, that’s not really what the economy is like now. What I want to argue is that the whole crazed phenomenon of the dot com years in the new economy was really only the culmination of 20-30 years of structural changes in the economy. And those structural changes in the economy, they didn’t leave. Yes, the dot coms cleaned out and left; but all of the structural factors of the economy that led to that phenomenon are still with us, and they’re going to affect us significantly. Here are the key factors: (Slide 2).  I wont read those to you—you can read them yourself--but I’m going to talk to you about each of them. And my argument is that these changes started in the 1970s and they are really what’s driving us, the key environmental influences in our economy today.

First issue I want to talk about is that we have had a change in fundamental corporate strategies nowadays. (Slide 3) And if you look at these two charts, the chart on the left on the bottom, that is kind of the classic vision we have of the corporations in the 1950s and the 1960s, the hierarchical pyramid. That chart on the right: those are business networks around Cisco Corporation! That’s what corporations are structured like nowadays, and I’ll explain this in a moment. If you went to business school in the 1950s, and really up until the 1970s and 1980s, the ideal vision you would have of a corporation was the vertically integrated pyramid. We have a headquarters office, then we have various divisions, and really everything was done inside that corporation. So, for the 1950s’ General Motors, about 90% of the value-added of a car that it made was done within, and by, GM. Today that number is about 30 or 40%. The tires are produced elsewhere, the marketing could be elsewhere, somebody else does the advertising, someone else does the spark plugs, someone else runs the dealerships, all these kinds of things. Those things used to be in the corporation in the 1950s, inside the corporation They’re not in the corporation right now. Why is that? Because management theory and management thinking changed. It used to be that that was the way you were supposed to structure a corporation, that was the ideal type. Well, people started talking about this idea of core competency, according to which what a corporation should do is focus on what it does best, and outsource everything else. So, that idea of doing everything in-house changed. And I’m not using outsourcing to talk about going to China, I’m just talking about having someone else do other things for you in general. And this could be everything from janitorial services, to running the cafeteria, to moving the spark plugs, to doing the marketing. Take a company like Nike. What is Nike’s core competency? Marketing shoes! Ok, you get it. They don’t make shoes; they outsource all the manufacturing of shoes. All they do is design and market the shoes--that is Nike’s core competence. If you look at Nike’s headquarters! Nike’s headquarters is about four or five hundred people. Again, think of a shoe factory that would be in the region in the 1950s if it had a marketing reach of that scope It would have thousands of people all inside of that corporate pyramid. And that’s very typical. And in fact you have nowadays, businesses are even willing to outsource what we used to call the crown jewel, the stuff we had to do in the corporation: manufacturing, R&D all of these types of things. Cisco, for example, you see that little chart there, they don’t do any of their own research and development. They buy start-ups, that’s their research and development strategy. They use their cash to buy promising start-up companies, that’s how they do R&D, they don’t have their own R&D lab.

So why does all this matter? This matters significantly because the fact that corporations, large corporations, decided to focus on core competency means that there are lots of opportunities for new businesses, ok? Whether that’s providing the janitorial services, food, all of these things that I’ve talked about. That’s one of the reasons why you see the rise in new businesses, because of this changing corporate strategy. All of the stuff that used to happen in a big corporation now occurs outside of it, through these networks. You’ll see where I’m heading with this in a moment.

That’s one big change you see in the economy. The other big change you see in the economy, which is both a cause and an effect factor here is business churn (Slide 4).  We have businesses rise up much faster than they used to, and they die much more quickly and easily than they used to. And a classic example of this, of course, is Enron. Enron was #1 in the Fortune 1000, and two years later, it declared bankruptcy. Now there’s obviously illegality issues that caused that, but to think that a corporation can rise so high, and basically go to chapter 11 in the course of two years is amazing. Think about Netscape. Whatever happened to Netscape? In 1995 what was the business of the year? Netscape. That’s 9 years ago, folks!. Basically, it doesn’t exist anymore, it’s a small division of AOL. But again it was a world leading company nine years ago. The point I’m trying to make is these businesses rise and die much faster than they used to. Part of the reason is b/c tangible assets are less and less of a value in a corporation. Think of a company like U.S. Steel. U.S Steel has lots of assets like real estate, capital good, machinery equipment, coal, you know, iron, all the things that are used to make steel. What were the assets for a company like Enron? Nothing. It was in everybody’s brains, right? It was the real estate that they had, in terms of physical buildings and office equipment and that kind of thing. That was most of the physical assets of a company like Enron. Not a lot of tangible value inside those kinds of assets.

The other big change we’ve seen in the economy is a rise, a huge boom in new ways to finance businesses (Slide 5).  That has been a tremendous change. I’ll give you this example, which is from the height of the dot com movement: a hundred and three billion dollars were invested in venture capital in 2000. That’s an aberration, but I think in some ways it’s reflective. You know what a hundred and three billion dollars is? That’s the gross national product of Ireland! That’s a heck of a lot of money, folks. A hundred and three billion dollars financed just in the United States, mainly in technology businesses that year. Pretty incredible! This year we’re in a so-called slump, and still we’re doing 18 billion dollars: that’s still the fifth best year ever in terms of venture capital. So we’re never going to be $103 billion, but the venture capital business in the US is likely to be, over the course of the next couple decades, $20 to 40 billion of new capital to invest in businesses. In 1990 the venture capital in the US was $2 billion. So we have consistently been, even in this slump in the venture capital industry, between $20 to 40 billion. That’s money that did not exist 12 years ago. Angel Capital, which are individual investors that back businesses, they invested $18 billion in new businesses in 2003. The rule of thumb is that, normally, the size of Angel’s investments is equal to the size of institutional venture capital. You have basically two pockets; So we have $36 billion available for investment that did not exist as recently as 15 years ago. Then you’ve got securitization of home mortgages, right? Again, look at a company like Fannie Mac, how that is moving. How do people finance their businesses? Second loans, second mortgages on their homes. That’s how many people finance their businesses. So the type of business, like Fannie May, that makes it easy to get a mortgage, is also an important tool in financing businesses. And then, last but not least, how do many corporations fund themselves these days? High yield securities! you know, what we used to call high risk securities, junk bonds. In 1985, Michael Milken went to jail for creating these things, well partially for that reason. And people said: we’re not going to use these kinds of financial vehicles to finance our businesses. Now they are an everyday part of the corporate financial landscape. Again, the basic point I want to make is: If someone wants to start a business, someone wants to grow a business in the United States nowadays, it is relatively easy to get the money if you are serious about it. All of these financial tools that didn’t exist 15 years ago are in place nowadays. I’m not saying it’s simple, but I’m saying that there’s a lot more money out there than there used to be.

And so, last but not least, the internet and new technologies (Slide 6).  A lot of people seem to associate the internet with entrepreneurship. New business starts, you know that’s all about technology--computers caused that. That’s not true at all. What happened was that the change in our economy that began in the 1970s, and only then, boom, about the late 1980s and 1990s, the effects of information technology and the effects of the internet started to hit. Just last week, or this past month, was the 10th anniversary of the world wide web. The internet did not really boom in this country until the web came. And so we have a boom, and all these transformations in our economy are occurring for 20 years, and then in 1995 the web starts affecting our business. So we’ve been in this revolution really for only 10 years. But this kind of transformational change around IT, even though it came late and didn’t cause the changes but had only a reinforcing effect, does have effects which are profound and probably permanent. It makes it much easier for people to start business, it increases competition. Again all of these changes we see in our economy are caused by this…partially caused by this.

So, what does this mean? It means again that our economy is going through a fundamental transformation. And, again, one of the critical outcomes of this is the rise of entrepreneurship and the entrepreneurial businesses, new pasturing businesses becoming a much more important part of the economy. The bottom line to take away from this would be that economies of scale, which is the large vertically integrated hierarchical pyramid, are now changed by innovation. The economy of innovation: again, you don’t have to be big, you don’t have to be rich to be innovative—whereas you did need to be big and rich to have economies of scale. (Slide 7)   And again, some of these statistics, some of the factors that are going on…the one in the middle is the one that is amazing to me. 11% of American adults are involved in starting businesses. That is a lot of people. So in this room we have about 100 people, 11 of us are involved in the starting of a business in some way, shape, or form. That is quite a transformational change in our economy. Again, I just saw a poll yesterday that said 40% of Americans would like to start a business. That tells you how widespread this new kind of entrepreneurial innovative thinking is in the American economy and the transformational effects it is starting to have. I’ll tell you a story about this, and I think it’s pretty pertinent to this contrast of economies of scale with the power of innovation. You probably have all heard of the famous economist John Kenneth Galbraith. In 1969, he wrote a book called "The New Industrial State". In that book he argued that small business was dead. Corporations, large corporations, multi-national corporations if you will, were the only ones that could be innovative and dominate the world marketplace. He was almost exactly wrong in that respect. Because, at the beginning of 1970, small businesses began to become the majority and to provide the majority of employment in the United States. So he was pretty much exactly wrong in his assessment. But that was the thinking in 1970: small is dead, big is beautiful. And what we found is that the exact opposite has happened. Small new businesses account for most of the innovation, account for most of the jobs, most of the dynamism in the American economy.

Now what does all this mean? Again, you’ve all been talking about this today, so I’m not going to belabor these points, but again, these (Slide 8) are going to be some of the key factors that are going to be critical for economic growth and prosperity in the 21st century.

What does this mean for Lancaster, that’s the more important question for us today. Well, I think it means some good and some bad things. Where is Lancaster positioned in this front? I would say that, in many ways, the central PA region is very well situated.  (Slide 9)  You have a tremendous legacy of people starting successful businesses; you have Armstrong: not quite what it was, of course, but that is a tremendous homegrown business that was built in this community. You have a diverse local economy. You’re not a one company town here. You have strong healthcare, you are strong in education, strong in manufacturing, strong in agriculture, strong in tourism. You have quite a diverse, powerful mix of businesses in this community. You have excellent support institutions, this institution right here, Franklin & Marshall College, the Lancaster EDC, the Lancaster Chamber. As I said, I travel all around the US, and do economic development work all around the US. The one thing to me that’s very different about Lancaster compared to other places in which I’ve worked, is the quality and the commitment of leadership in this community. It is significantly different from most places I’ve worked…much more civic-minded leaders in this community than I’ve seen in many other places. Last but not least, you’re strategically located. This is a great location. You’re between two large markets … you have Baltimore-Washington and Philadelphia, well-situated on the eastern seaboard, so again the location is good.

Okay, now for the bad news. What are some of the challenges you have in this community? (Slide 10)  Again, educational attainment of the population is lower than the average nationwide. The diversity in the community is less than we see elsewhere. If I wanted to summarize this…three of these issues, the top three deal with the question of human capital and talent. Again, we know that talent is really the most important ingredient in building successful businesses and successful economies these days, and these three are really about that. You can certainly understand the one about upgrading the educational resources. But what about issues around diversity? Embracing diversity, having a much more diverse workforce, in all its shapes and forms, means that you’re going to have a more effective and more productive workforce. What it also means is that younger workers, talented workers, creative workers, are attracted to places that are diverse. So, not only does that mean we should embrace diversity because it’s the right thing to do on equity grounds, and fairness grounds, and all of these other factors, it also make sense on economic grounds because it will serve as, almost, a recruiting tool, a magnet for other young people to come to this community and live in this community. And that certainly ties into the issues surrounding Lancaster City, making Lancaster City a more vibrant and exciting place. And again, there are lots of people involved in these sorts of developments, so I won’t belabor that much at all. The last thing, again I think is really critical, and that’s a separate, is this issue of thinking regionally. We often talk about Lancaster County, Berks County, York County--those are political sub-divisions, they are not economic sub-divisions. And for this region to prosper, it needs to think of itself as a region. You are not going to be able to compete with Barcelona or Paris or Beijing or Shanghai as Lancaster. But as Central PA, you may have the scale of resources, the capacity to be able to do that. Lancaster could go it alone, and basically be as prosperous as it has been for some time. But to really expand and become more prosperous and more wealthy, the way to do that is to embrace more of a regional perspective in the community. Again, think beyond the borders of the county, beyond the borders of the state, and think beyond the borders of the country in terms of developing the region.

Now, how does this tie into the Lancaster Prospers agenda? Again, as you can see, these are the seven priorities that came out of the Lancaster Prospers effort to look at where the community should go in the next 10-20 years.  (Slide 11)  I see the first one is to collaborate on regional initiatives. Work more with the wider PA region. The second one is why we’re here today. To move ahead, we need to better understand our own local economy, and so having this center at Franklin & Marshall College, is just great. I’m really pleased that this Center has been able to get set up here. Develop a marketing plan, that’s really more of a marketing plan around economic development. This region has marketed itself well as a place for tourism. This is the place where the Amish are; this is what people in California know about Lancaster County, right? But they think you all ride around in a horse and buggy. They don’t recognize that this is a place that has a lot of exciting businesses, a lot of innovation, a lot of entrepreneurship going on. So what we wanted to talk about in the Lancaster Prospers initiative is how can we sell that other side of Lancaster County. Not just the quaint Amish, but to sell the community as a good place to do business, and to start businesses. So that’s what the next point is all about, creating a local research and development center. Again, one of the challenges of this community is that it has been focused traditionally on traditional manufacturing. It has not required higher education. Having some sort of center for R&D around healthcare, perhaps around some of the clusters that Scott Sheely talked about, is a way not only to generate homegrown talent, but to recruit other talent into the community. This strategy around industry centers of excellence, is basically Scott Sheely’s plan around clusters, so I’m not going to belabor that point, and he talked about it this morning. Nurturing local entrepreneurs. Lancaster Prospers is putting together a strategy around that. In fact on November 18, they’re going to have a meeting of people who want to brainstorm about ways of creating support for local entrepreneurs in this community. So, if you’re interested in that, you can come see me, or you can contact Dave Nikoloff, but I can get you information about that, because I’ll be back here in town for that session. And then last but not least, we talked about creating vibrant urban centers. Creating, revitalizing, regenerating Lancaster City, we’re not doing that because we want the place to look nice. That becomes a critical part of the development strategy for this community. You are trying to make that the hub of the innovative activity, the creative activity that is going to turn this community. That’s one of the primary reasons to revitalize Lancaster City, to ensure that all parts of the county can develop equally and become a vibrant place for people to live and work. I’m going to stop at that point.

Before sitting down, let me also give you some further references on all of this material (Slide 12) and (Slide 13). And, since we are in an academic setting, let me say that there will be a test next week for you on all of this material, so…(laughter).

Finally, there is my contact information (Slide 14).  Thank you for the opportunity, and I look forward to your questions.