Location, Location, Location: Why It Still Matters in Business

In today’s hyperconnected society and increasingly globalized economy, it would seem geography is no longer the linchpin it once was for multi-national organizations. After all, the “death of distance” has enabled business to be done – successfully – to and from anywhere in the world. But innovation and competitive strategy expert Gary Pisano argues that’s not exactly true. Information sharing may be immune to location, but knowledge sharing is not, according to Pisano. And businesses that ignore the paradox will suffer.

Knowledge has powerful local character, Pisano adds, and companies need close access to that knowledge to grow and prosper. In fact, “where” is one of their most critical and expensive strategic decisions. Yet, many disregard its often irreversible impact – most notably, where to locate R&D labs and manufacturing operations – and don’t reap the invaluable “spill-over” benefits from nearby knowledge hotspots.

Companies that do a better job exploiting the fruits of their local knowledge ecosystems are much more likely to achieve high innovative performance and prosper over time, says Pisano, a Harvard Business School professor who has spent decades researching and teaching knowledge creation and innovation. Presence in “brain power” centers pays off in new products and new ways of doing business, a theory he proves in his latest Harvard Business School working paper (focused on the pharma industry), detailing several supporting empirical findings, including these two:

  • Geographic proximity is a significant predictor of how much know-how is absorbed from a given hotspot
  • The importance of geographic proximity increases over time

But while geography of knowledge is important, it’s still not sufficient on its own – a pivotal conclusion Pisano drives home in his paper. He stresses that management practices, policies and culture are just as critical in ensuring knowledge is absorbed and leveraged in the right ways needed to drive innovation throughout an organization. It’s the open flow of information and communication that underpins a company’s ability to thrive – “at home” and around the world.

Stern Strategy Group: