Karen Harris: The Declining Cost of Distance

New technologies are driving down the cost of moving people, goods and information in advanced economies, reshaping critical decisions on life and work for companies and their employees. Karen Harris, managing director of Bain's Macro Trends Group, discusses why companies need to recognize the profound shift in spatial economics.

Read the transcript below.

KAREN HARRIS: The cost of distance, or what we call spatial economics, is a key driver of business decisions, but not one that's recognized directly by most of the businesses in the world today. In advanced economies it is declining sharply, and businesses will need to take that cost into account when they think about where their employees will be, where their customers will be, and where they want to put their own assets in the future.

The drivers of that change are a set of catalyst technologies that are all driving down this cost. So things like 3-D printing, which enables small batches of production, changing the economics of manufacturing, the availability of broadband or low-Earth-orbit satellites driving that. Even autonomous vehicles changing commuter flows and how people can move around farther out on the horizon.

All of those are impacting how people think about where they deploy themselves. Do I need to live near a certain place in order to do my job, or can I choose where I live based on what I like and, therefore, be employed in X, Y or Z? So the hierarchy of decision making is changing, and we see that already in the younger generations who first ask themselves, where I want to be and then ask themselves what they want to do.

So we haven't seen a change this profound in the cost of distance really since the Industrial Revolution. Why do we all live in cities? Because pools of labor came together for higher paying wages that were enabled by manufacturing companies, for example. And yet we're all still clustered in the same way in advanced economies which are service based and moving well beyond manufacturing, and manufacturing, itself, is moving well beyond where it was during the Industrial Revolution.

So the risk today to business is that assuming that the model we've lived under for a hundred years will continue, will, over the next 10 years as this inflection point happens, create a great possibility of stranded assets. It will mean you could be putting your stores where your customers aren't, because people will more and more choose to live outside of cities and be able to. People put quality of life possibly in having more space or having more affordable education for their children.

As the cost of Tier-1 cities continues to rise due to capital superabundance, the middle class will be able to opt into a better quality of life farther and farther away from the urban core. If that's your customer group, then you could be catering to them in the wrong place. We see the need for businesses to be more experimental in how they use some of these new technologies, and really think about where their human capital might be based for the next two decades of growth.

Read the Bain Brief: Spatial Economics—The Declining Cost of Distance

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