Small Business Labs

Food Trucks = Business Model Innovation

The gourmet food truck craze sweeping the nation is a classic example of business model innovation.  

And the response from brick and mortar restaurants is a classic example of how incumbent industry participants tend to respond - by using their political power to try and fend off the innovative new firms.  

Business model innovation refers to taking a new approach to an existing business or industry. Targeting new customers, changing what is offered, or redefining how an offering is provided are all examples of business model innovation.  (see HBR's Reinventing Your Business Model for a more detailed description).

Gourmet food trucks are using a variety of new business model approaches. The main one is the use of a low cost, flexible and agile delivery platform - the truck.  But there are others, including:

• a focus on high quality food at value prices
• alternative, unique and fast changing menu items
• social media to connect and communicate with customers
• a value proposition that includes fun and new experiences

Industry incumbents often struggle to respond to competitors using innovative business models. Harvard Business School professor Clayton Christensen coined the term The Innovator's Dilemma to descibe this issue.  The problem is incumbents are often locked into their existing approach to doing business, especially if they've been successful.  

One way incumbents can and do respond is via the political process. Industry incumbents tend to have the resources and expertise to influence policymakers and regulators against the disruption of their business model. 

This is currently happening as brick and mortar restaurants realize food trucks aren't a fad, but potentially serious competition. Recent legal proceedings in San Francisco and food truck regulation hearings in Chicago illustrate the legal, political and regulatory battles taking place in many cities across the country.  

In most of these proceedings, brick and mortar restaurant owners are claiming that food trucks compete unfairly because they don't pay rent, property taxes and other expenses associated with traditional commercial space.  In other words, they are saying it's unfair that food trucks are using a different business model than they are.  

It seems obvious to me this is not a good argument.  

More relevant and supportable is the view by restaurant owners that food trucks are subsidized by free-riding on public property -- the street -- as their place of business.  Here I think they have a point.  

It will be interesting to see how this plays out.  Brick and mortar restaurants have a powerful card to play - they pay a lot more local taxes than food trucks do.  During these times of fiscal stress, few local governments aren't going to be influenced by this.

Many other industries have tried to use political processes to fight off business model innovators. Few have succeeded.   

Examples of failing to stop business model innovators via the political process include the U.S. auto industry versus Japanese automakers, traditional airlines versus low cost airlines, booksellers versus Amazon - I can go on with examples for a long time.

The real question is whether or not food trucks offer a better solution to their customers.  If they do, they likely will eventually overcome political roadblocks and win in the marketplace.  Based on our research, we think in many cases they do offer a better solution.

Another interesting question is whether or not food trucks are an example of disruptive innovation - which are innovations that rewrite an industry's rules and/or overturn widely accepted industry practices.

Disruptive innovation is rare, but because it changes industry landscapes, it's very visible. There are many famous examples of disruptive business model innovation - Southwest Airlines, Dell Computer, Charles Schwab, Nucor Steel, Amazon and Google all used business model innovation to change an industry.

Disruptive innovation often starts through low cost offerings to underserved markets, and then moving up market to higher value customers.  The shift from roach coaches to gourment food trucks fits this paradigm.  

But we don't think food trucks will disrupt the entire restaurant industry. Their offerings are too limited.

They could, however, be disruptive to quick service and fast food restaurants, as well as take-away food providers.  We'll have more on this topic in the near future.  

One thing we've consistently found in our research is that small businesses are natural innovators.  Food trucks are another example.

Small Businesses Often Choose Not to Grow

One of the things we consistently hear in our interviews with small business owners (male and female) is most don't want to grow their businesses beyond a certain size.  In most cases the size they want to limit their business to is quite small.  

We first explored this topic years ago when we held a series of focus groups to define small business success.  We found small business owners defined success as meeting their personal objectives for the business.  Rarely was high growth or getting big a priority. 

One of the main reasons they don't want to get big is they feel it wouldn't be worth it.  

With this in mind I'm always curious about studies that show certain small business segments aren't growing as much as someone other than the owners thinks they should.  

For example, the Celebrating Women Business Owner's series over at Open Forum talks about women's businesses having growth pain points.  Key quote:

"our study also found that while women are starting and growing new and innovative ventures in droves, many experience growth pains at the 5-to-9 employee and $250,000-to-$499,999 levels. "

This study seems to assume all small businesses want to grow bigger than this size.  We don't think this correct.   

This is not to say that small businesses don't struggle when they get to 5-9 employees.  They do. Getting bigger than this generally means moving beyond the direct span of control of the owner.  Many small business owners (both male and female) don't have the skills and abilities to do this.

But based on our research, many (both male and female) don't want to grow beyond this point. They don't think the added complexity, time and effort associated with running a bigger business are worth it.

I'm all for women (and men) building big businesses, assuming they want to.  

But let's not assume they all want to.

The Boys Initiative - Trying to Stop the End of Boys

One of the great things about blogging is you hear from lots of interesting people.  For example, the folks over at The Boys Initiative commented on our post The End of Boys.

The Boys Initiative is a non-profit focused on promoting boys health and achievement.  They have a fascinating blog - Attention Must Be Paid - that covers the wide variety of issues boys are facing.  

The editor of the blog, Mark Sherman, has a great article in Psychology Today called The End of Boys.  It contains the following scary stats on girls (and young women) versus boys (and young men):

For every 100: 

• tenth grade girls who play videogames an hour or more a day, there are 322 tenth grade boys who do.
• girls who are suspended from high school, there are 215 boys who are suspended.
• young women who earn a bachelor's degree, there are 75 men who do.
• women ages 25-29 who have at least a bachelor's degree, there are 83 men who do.
• women ages 25-29 who have a doctoral degree, there are 80 men who do.
• females ages 15-24 who kill themselves, 586 males do.
• women ages 18-24 who are in correctional facilities, there are 1439 men who are behind bars.

The problems boys are facing is a huge societal issue. The New York Times recently pointed out how changing U.S. family structures are hurting income equality and the decline in the percentage of men who contribute time and money to raising children. Both are driven at least in part by the end of boys.

Please visit The Boys Intitiative and their blog for more information on this important topic.

Household Income in America

People tend to way overestimate how much money people make.  When we tell people the median U.S. household income is about $50,000, we're often told that can't be true and it must be much higher.  

NPR has a nice summary of the household income for America's 114.6 million households that includes the following chart.  It shows a breakdown of how many households made different amounts in 2010 (U.S. Census data).

   

Is Big Data Getting Too Creepy?

One of the more interesting issues around Big Data is whether or not consumers (and business people) will find its use creepy.  

Over the last year we've been researching Big Data and what it means for small businesses and consumers. One of the issues we've been exploring is how consumers and small business owners look at data privacy. Without a doubt, "creepy" is a term we heard a lot in our interviews - especially after we explain how personal data is being used by marketers.  

Despite our interviews, the recent flap about Orbitz steering Mac users to more expensive hotels caught us a bit off guard.  

The reason? So much truly personal data is being used for targeting it's almost laughable people would get worked up about a website targeting you based on your operating system.  This shows how little the average consumer understands about how personal data is being used in marketing.  

This is starting to change, mainly due to increasing coverage in the media.  A few examples include:

 - Paid Content's Big Data and the Changing Economics of Privacy explains that "dozens of companies have sprung up that will prowl into a person’s past for as little as $2."

 - Consumer Data, But Not For Consumers covers an attempt by a NYT reporter to gain access to his personal data held by the Acxion, one of the leading database marketing company that collects and sells personal data on consumers.  The reporter was unable to access the data they had on him.

Note to the folks at Acxion, you really should do a better job of dealing with NYT reporters.  

 - Big Data or Big Brother has a great line that databases of personal information ''become like a honeypot to people who have malicious intent''."

 - The Atlantic's The Creepiness Factor: How Obama and Romney Are Getting to Know You covers how big data is being used by the political campaigns.

We've been researching online privacy for years and have always been surprised how little interest there is on this topic by most Americans.  So far we've been more than willing to give up our privacy and personal information with little concern about how it's being used.

But as I said above, this is starting to change and companies that collect and use personal data need to realize and adjust to this change.  

Confirmation Bias and Decision Making

Regular readers know survivor bias is our favorite bias here at Small Business Labs.  But if we had a 2nd favorite bias, it would be confirmation bias.  This is the tendency for people to favor information that confirms their beliefs or hypotheses.

There's been a flurry of recent articles on confirmation bias:

1.  Doctors, Scientists say fracking critics misrepresent some facts to make their points is from the Washington Post.  It covers the many erroneous claims being made by opponents of natural gas fracking. Key quote:

"Critics of fracking often raise alarms about groundwater pollution, air pollution, and cancer risks, and there are still many uncertainties. But some of the claims have little — or nothing— to back them."

2.  When Bad Theories Happen to Good Scientists from the Wall Street Journal looks at how scientists tend to try to prove their theories rather than see whether or not they correct.  Key quote on how they behave:

"They not only become strongly attached to their own theories; they perpetually look for evidence that supports rather than challenges their theories."

3.  We're all Climate Change Idiots from the New York Times talks about how most Americans have a hard time with issues like climate change. Confirmation bias is a major factor, as illustrated by this quote:

"We also tend to pay attention to information that reinforces what we already believe and dismiss evidence that would require us to change our minds ..."

We run into confirmation bias all the time and struggle with it ourselves.  

Our goal as researchers is to go where the data takes us - and it sometimes takes us to places our clients and audience don't want to go.  When this happens we're amazed the lengths some people will go to ignore or discredit the facts.

Most times confirmation bias just hurts a business, but it can also kill.  Kodak is a great example.  They managed to convince themselves digital photography was not going to go mainstream despite overwhelming evidence to the contrary.

Our advice on dealing with confirmation bias is:

 - try to base decisions on hard data.  This isn't always possible, but the rise of data and analytics means small businesses can be more analytical in their decision making.  Our Big Data category covers this trend in more detail.  

 - get multiple perspectives on key decisions.  We often interview experts from other fields when we're studing a problem.  They bring a different perspective and are more willing to challenge conventional wisdom.  They're also more willing to challenge our assumptions and analysis.  

 - Spend some time identifying and understanding what your views and beliefs are and how they may be impacting your decision making. For example, we're very pro small business and self-employment. Because of this we have to constantly challenge ourselves not to let this bias blind us from seeing negatives in these areas.  

 - Have strong opinions, but hold them weakly.  In our volatile, uncertain, complex and ambiguous world change is the only constant.  Be open to change and accept that even some of our most strongly held business views and beliefs will likely have to change at some point.

Are There 3 Million Food Trucks in the U.S.?

All Things Digital's article The Food Truck Revolution: Now Armed With Point of Sale iPods suggests there are 3 million food trucks and 5 million food carts in the U.S.

Their source is an article on Entrepreneur's website.  

During our food truck project we've heard a wide range of estimates on the number of food trucks in the U.S. - everything from a few thousand to hundreds of thousands. 

But 3 million?  Let's do a quick sanity check on this:

1.  There are about 350 million Americans.  3 million food trucks would mean 1 food truck for about every 117 Americans.  This means my town of Lafayette CA (population 25,000) should have 213 food trucks. We don't.

It also means San Francisco should have about 7,000 food trucks. This is a bit higher than the roughly 250 we think SF has.  

2.  The average food truck employs around 3-4 people (a conservative estimate) including the owner.  3 million food trucks would mean about 10 million Americans work in food trucks. According to the U.S. Bureau of Labor statistics, a bit more than 140 million Americans are currently employed.  This would mean about 1 out of every 14 employed Americans works in a food truck. This seems unlikely to me. 

3.  According to the NPD Group there are about 600,000 restaurants in the U.S.  The U.S. Census concurs.  This would mean there are 5 food trucks for every brick and mortar restaurant.  Sounds like a lot to me.

4.  According to TruckInfo there are about 15 million trucks on the road in the U.S.  This means 1 in 5 trucks on the road are food trucks.  

5.  If the average food truck is 15 feet long (another conservative estimate) and they all parked in a row they would stretch 45,000,000 feet.  This is roughly 8500 miles, or about distance from New York City to Hong Kong.  

You get the point.

It's almost always hard to find good numbers on new industries or new markets. Also, it's easy to find bad online statistics.  For example, I have no idea if TruckInfo is a good or bad source of data - but it didn't stop me from quoting them.   

So the lesson is don't believe everything you read about market sizes.

We don't know how many U.S. food trucks there are, but our guess is closer to 15,000 - 20,000 than 3 million.  

 As for 5 million food carts ....

Gallup Says Move to the Upper Midwest

Gallup's Where You'll Want to Live in 2032 looks at the state and regions of the U.S. with the brightest future.  

Aftering crunching a series of metrics that include economic, workplace, community and personal choice factors, they  are suggesting we all move to North or South Dakota (or at least nearby).  

The Gallup chart shows the results of their study by state.  Ice fishing anyone?

   

Food Trucks as Lean Startups

Information Week's What Food Trucks Can Teach IT Pros came out of discussions we had with the article's author, Patrick Houston, on the early findings of our food truck research project.

After hearing a bit about our research, Patrick suggested that food truck lessons also apply to IT. We were a bit skeptical, but he quickly convinced us. He also got us thinking about about how food trucks relate to another tech trend - lean startups. 

For those outside of the tech industry, the lean startup movement is based on quickly and inexpensively creating a product that can be tested with customers. In lean terms this is called the "minimum viable product".

The goal of the minimum viable product is to verify that people are interested in what you make, before you sink large amounts of time, energy and money on the project.  

After creating the first version, you quickly iterate to create better versions based on customer feedback.  The lean startup methodology calls this the "build - measure - learn loop".  

At it's simplest, lean startups focus on rapid prototyping, business flexibility, cash and resource conservation and a laser-like focus on customers to quickly adapt to market needs.  

Lean startup approaches and methods have mostly been applied to software and internet businesses. But it's interesting to look at food trucks through the lean startup lens:

1.  Food trucks are much cheaper to start and can get to market much faster than brick and mortar restaurants.  In many ways, food trucks fit the Lean concept of the minimally viable product.

2.  Food trucks can quickly and easily test new concepts, menus and recipes.  In many cases food trucks are being used as lean startup-like laboratories to test potential brick and mortar restaurant ideas.

3.  Food trucks take an iterative approach to their menus and even location based on customer feedback.  "Build-measure-learn" is a daily occurrence with food trucks.

4.  Food trucks are tightly focused on their customers and interact with them every day.  

The Lean Movement is very hot in Silicon Valley (see this Wired article) and has both fans and detractors.  But the basics make sense and it's interesting to see how food trucks fit into this paradigm.

We'll have more on this topic as we get closer to finishing our food truck research.

Contingent Workforce Expands by Millions over Past 7 Years

Staffing Industry Analysts (SIA) has a really interesting post on North American contingent workforce growth. For those not familiar with SIA, they are leading analyst firm covering the staffing industry.

The chart below from their article shows the growth in the percentage of the contingent workforce as share of total employment at firms with more than 1000 employees.

     
What makes it interesting is that according to our friends from the U.S. Census via the SBA, firms with 1,000 or more employees employ about 53 million Americans.

Which means over the last 7 years firms with more than 1000 employees have added about 2.7 million contingent workers.  Since these firms employ only about 40% of all Americans, you have to assume the total increase in the contingent workforce is much larger than 2.7 million.

And this is a conservative estimate.  A recent Aberdeen study showed that 26% of the corporate workforce is contingent.  

The shift to contingent work is one of the most powerful and important workplace trends we follow.  It's also the topic we spend the most time researching and the one we write the most about.  

We'll have more on this topic later this summer when we release the 2nd Annual MBO State of Independence study results.