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.

The Wall Street Journal's Small Business, Big Innovation Contest

This summer the Wall Street Journal launched Small Business, Big Innovation, a competition showcasing creative and innovative methods small businesses used to survive the Great Recession. 

They've had dozens of entries showcasing a broad range of innovations.  A couple of my favorites are:

Axle Boy Enterprises was a consumer business providing custom auto accessories.  When demand fell due to the recession, they diversified by adding a business-to-business operation targeted at commercial clients.  Key quote from their submission:

Using similar technology and equipment employed in the automotive side of our retail operations, we added a business that remanufactures airport ground services transportation equipment axles. This expansion operates on floor space that had been idle after a previous downsizing in 2008, more fully using our building space.

This is a great example of leveraging existing skills, capabilities and business infrastructure to enter an adjacent market. 

Vidler's 5 & 10 Inc. is an 80 year old retail store who faced declining sales from 2007 to 2009.  They responded by increasing their marketing and using social media.  Key quote for their submission:

Full-scale marketing push starting in mid 2009: radio advertising for first time in history of business; embraced social media with Facebook page, Twitter and blog updates; new and revised website; use of Google Adwords and online review sites. Regular emails to growing customer base... 2010 gross sales one of best years ever; exceeding 2009 by close to 19% — best year-over-year increase in our history. 2011 is on pace to meet or beat 2010.

I love this story.  Independent 5 & 10 stores are a dying breed.  But by adopting new marketing tactics and methods, Vidler's is showing independent retailers can not only survive but thrive. 

I really like this contest because it helps dispel the myth that small businesses aren't innovative.  The reality is innovation is part of a the DNA of a small business and they innovate both reactively and proactively.  They innovate reactively in response to customer, market and competitive pressures.  They innovate proactively by scanning for and acting on new business opportunities.

We cover this topic in more detail in our Defining Small Business Innovation research memo. 

There are many more great small business innovation stories at the site.  Voting goes on until the end of September and the winners will be announced in November.  Take a look by clicking here.

Disruptive Innovation and Small Business Lending

We contributed an article to Banking.com discussing how non-traditional small business lenders - including folks like Wal-Mart, Office Depot, Google and others - are starting to provide small business credit services. 

Most of these non-traditional lenders are targeting very small businesses - individuals and micro-businesses - with loans ranging from $5000 to $25,000. 

This is a market segment traditionally ignored by the financial services sector because they are hard to reach and serve profitably.  But the new lenders believe through the use of technology and online banking methods they can be successful serving this group.

It's not only big companies entering this market.  A number of startups are also targeting this group. 

Disruptive innovation is a term coined by Harvard Business School professor Clayton Christensen. It describes a process by which a product or service creates a new market or reshapes an existing market by delivering simple, low-cost innovations to a set of customers who are ignored or underserved by industry leaders.

After establishing themselves in the low end of the market, disruptive innovators often move up, challenging traditional competitors for their best and most profitable customers.

We think we're seeing signs of disruptive innovation occurring in the small business credit space - and in particular credit services for the self-employed and micro-businesses (less than 5 employees). 

We hope we're right on this.  This underserved segment needs better access to credit services. 

Disciplined Dreaming: Jazz as a Metaphor for Business

The book Disciplined Dreaming: A Proven System to Drive Breakthrough Creativity provides a a roadmap to new ideas, and helps business leaders at all levels unleash their creativity and creativity of their teams.

One of the key themes of the book is that Jazz combos are excellent examples of innovative, high performance teams.   

Jazz musicians are natural risk takers, and a big part of Jazz is improvisation and creativity. 

Jazz muscians are constantly experimenting and trying new things. 

But successful jazz musicians also rely on each other, feed off each other to create individually and collectively - all within the structure of the team. 

From my perspective, the key quote in from the book is:

Companies that will win the the future will function more like jazz bands.  They will constantly reinvent their work and seek fresh, new approaches.  They will reward risk-taking and originality, the new currency for success. 

Another great quote is in the same paragraph (page 13 of the book):

Your ability to improvise and your comfort with risk-taking will determine how well you succeed in this increasingly creative culture.

Even if you don't like jazz music, it's well worth your time to better understand how jazz music is created and performed. 

On a personal note, my son is studying buisness and jazz at the University of Richmond.  He loves to perform, but doesn't see himself pursuing it as a career.  The school has a nice video of him describing his program and playing.  I think the lessons he learns from jazz will be of great value in his future endeavors.   

A couple of other resources on this topic are:

Jazz Impact: a jazz band that links jazz to business.  They perform at a wide range of corporate functions. They have some good material on jazz and business on their site.

Jamming:  The Art and Discipline of Business Creativity: Harvard management guru John Kao's book on jazz and business creativity. 

Business Jazz YouTube video:  UK management guru David Butter describes how jazz provides a terrific metaphor for business – structure with improvisation, teaming with listening, preparation with performance.

The Return of Intercity Bus Service

After almost disappearing - when was the last time you were on a intercity bus? - the bus is now the fastest growing way to travel.

Innovative bus companies like Megabus and Bolt Bus offer convenient service, comfortable seats with power outlets, WiFi access and super cheap fares purchased online.

The buses don't use a bus station, they pickup curbside at locations listed on their websites.  This makes it very easy to quickly add or reduce service. 

The sweet spot for the service appears to be in mid-range trips of around 200-300 miles.  These are too short for air travel but too long to easily drive. 

The new intercity bus lines are a great example of using business model innovation to reinvent an industry.  With gas prices increasing and more focus on reducing green house gases, the outlook for intercity bus travel is quite positive. 

There's been a flurry of articles on this topic, including:

• Business Week - good overall coverage of the buses
• Switchboard - looks at the buses from a public policy point of view
• New Geography - detailed look from a policy and environmental standpoint
• The Economist - likes the buses but aren't sure if they will thrive long term

Fidelity on Leading Sectors for Innovation

I like to follow research from investment companies because they put their money (actually, other people's money) where their mouth is. 

Leading Sectors for Innovation from Fidelity Investments looks at innovations in health care/medical devices, media and entertainment and information technology. 

The medical innovation areas covered include genomics, biotech pharmaceuticals and digital health records.  Interesting quote on genomics:

"The cost of sequencing a human genome has fallen considerably over the past few years, enabling research that not so long ago was cost prohibitive. As a result, DNA sequencing has just been exploding. Eventually I think we’ll be sequencing everything—from newborn babies to cancers to cattle and corn. And the field has already been generating profits. The numbers speak for themselves: In 2006, this market was less than $100 million; in 2011, I’ve heard estimates that it may grow to $1 billion."

The media and entertainment section of the article focuses on the growing role of disintermediation and the growth of online advertising.  But what caught my eye was Fidelity's view on the IPO market:

"Over the next 12 to 24 months, I’m expecting an IPO pipeline—and the incumbent investment opportunities—the likes of which I’ve never seen before. These companies will be focused on creating whole new markets that haven’t previously existed."

The IT section focused on cloud computing and "big data."  Nice quote with data on the growth of cloud computing:

"The first area of cloud computing to really gain traction has been Software as a Service (SaaS). According to Gartner, a leading IT consulting firm, the combined market for cloud services such as SaaS is projected to top $20 billion by 2014, up from a little over $5 billion in 2009."

The article makes the important point that today is a time of great innovation and these innovations are leading to opportunities for investors. 

They are also leading to opportunities for entrepreneurs. 

Ultralight Startups

Ultralight startups:  little capital, just computer is an interesting article by the SF Chronicle's Tom Abate. It is about a UC Berkeley student who started a custom T-Shirt printing company in high school and continues to run it at college. 

The company is ooShirts.com and the founder, Raymond Lei, expects to earn over $700,000 this year from the business. 

Lei's total investment in ooShirts was $2,200. 

There is a lot of talk and discussion in Silicon Valley these days about bootstrapping and lean startups.  Eric Reis is credited with coining the term "lean startup" and preaches a "low burn rate" approach to running startup companies.  Many startups are incorporating lean operating methods. 

Lei's company is even leaner than lean startups.  ooShirts outsources almost everything and is tightly focused on keeping costs to a bare minimum. 

A recent WSJ article, Start-ups on a Shoestring, also covers ultralight startups.  The article profiles a series of companies that got started with less than $150 in invested capital. 

The trends driving the growth of ultralight startups are strong.  Technology is making starting companies of all types much cheaper.  The Internet makes finding and selling to customers easier.  Contractors can substitute contractors for employees and outsourcing services are available for almost all product and services categories. 

We expect strong growth in the number of ultralight startups over the next few years. 

Lessons from Turning Academic Research into a Business

I'm a bit behind on my reading and just came across The New York Time's article The Idea Incubator Goes to Campus.  It covers the growing trend of universities assisting professors in commercializing their research. 

We recently experienced this process first hand.  We had the opportunity to work with Zensi, a company founded to commercialize some very cool research - a method to sense and monitor home electricity use at the appliance level. 

Zensi was acquired by Belkin earlier this year.  The terms were not disclosed, but I can report the founders are very happy with the deal and thrilled to be part of Belkin- a company with manufacturing scale, global retail reach and proven expertise in developing slick consumer electronics. 

There are several academic research commercialization lessons from our Zensi experience: 

1.  Involve people with relevant business experience as early as possible:  Most academic researchers have a limited understanding of what it takes to create commercial products. 

A key reason Zensi was successful was one of the founding professors had prior business experience and they attracted a tech veteran as CEO very early in the process.  This allowed them to identify the opportunity and create a strong product prototype. 

While it's unrealistic to expect the average academic research group to have as much business experience as the Zensi did, it is possible for researchers to find highly experienced advisors and/or business help from university technology commercialization groups.

2.  Be realistic when it comes to fund raising:  Raising money these day is not easy.  It takes time, valuations are low and terms tend to be tough.  Most new entrepreneurs way underestimate how much time and effort it takes to raise money. 

3.  University commercialization departments can be friends and/or foes:  Zensi was lucky.  The universities involved - Georgia Tech and the University of Washington - were very supportive and consistently added value. 

Other university-based startups are less fortunate.  University commercialization departments exist to create value for their schools.  This can put them at odds with academic founders and potential investors.

To avoid potential problems, it is generally best to come to business terms with the commercialization department early in the process and before attempting to raise funds. 

4. Consider all your commercialization options:  Zensi wasn't considering being acquired by a large corporation, they were planning on rasing money and building a business. 

But several things changed this view.  First, while Zensi was able to raise venture funding it became clear the terms and valuation were not going to be as attractive as the team hoped.   Second, interest from large corporations (Zensi had several suitors) was much stronger than anticipated and they made strong offers. 

The large corporations also could develop Zensi's products more quickly and market them more broadly than Zensi could on its own.  This was very attractive to the founders, who are highly motivated by the opportunity to create products that cut energy use and greenhouse gas emissions. 

Don't get me wrong - building a successful company is a hugely rewarding experience and a lot of fun.  But it's not the only path to creating value. 

5.  Be realistic about the commercial possibilities of academic research:  The goal of most academic research is to create new knowledge or expand the boundaries of existing knowledge. Because of this, a very small percentage of academic research projects can be turned into successful products - at least in the time frames a startup company generally has.

TechShop, Ford Partner on Automotive Innovation Center

TechShop, a growing chain of membership-based DIY industrial workshops, announced a partnership with Ford to create a TechShop in Detroit. 

This partnership highlights a trend we posted on last week - the growing role hackerspaces and industrial coworking facilities are playing as shared work environments for entrepreneurs and inventors.   

The new Detroit TechShop is being touted as a way to spark innovation in the auto industry.  The joint press release describes it as "a collaborative effort to open a communal work center in the Detroit area for individual inventors."

Even more telling is a TechShop quote in a New York Times article on the new effort:

“Locating in Detroit with an automotive-focused innovation center is an obvious and clear opportunity,” said Mark Hatch, the chief executive of TechShop.

When TechShop first opened several years ago, it was positioned as a workshop for hobbyists.  The founders were surprised when many of their members used the facility to explore, start and operate businesses. 

TechShop still welcomes and caters to hobbyists.  But they have learned that inexpensive access to advanced machinery attracts entrepreneurs and inventors, and they have adjusted to better target and serve them. 

TechShop's shift is part of a broader set of trends towards lightweight manufacturing and hobbyists turning their passions into businesses.  These trends are covered in more detail in the Intuit Future of Small Business research memo Today's Hobbyists are Tomorrow's Hobbypreneurs. 

This also illustrates the expansion of coworking beyond offices as new and existing labs, research and manufacturing facilities increasingly offer coworking.

Frugal Innovation and Homemade Nuclear Fusion

One of the most powerful trends impacting business (and society) is the shift towards lightweight technologies. 

Smaller, cheaper, easier to use - yet advanced and powerful - lightweight technologies are enabling what economist Tappan Monroe calls "frugal innovation."   These are business and technological innovations that provide most (or even more) of the functionality of more advanced solutions, but are much more affordable - both for the producer and consumer. 

Lightweight technologies are enabling small businesses, and even individuals, to participate in industries that used to only be available to large corporations.  Consider the impact of PC-based desktop publishing on the printing industry.  The same thing is happening in almost all industries. 

The trend spotting site PSFK has a great example of lightweight technology meeting frugal innovation.  It turns out a group of amateurs are building homemade nuclear fusion reactors. 

This is not as scary as it sounds. Fusion reactions don't require dangerous nuclear materials like uranium or plutonium.  But no doubt the neighbors of these folks are still at least a bit nervous.

Needless to say, it wasn't that long ago that the idea of homemade nuclear fusion devices would not have been taken seriously.  And many are skeptical of these DIY efforts. 

But lightweight technology is letting them try.

For more on lightweight technology and what it means for small businesses, see this Intuit Future of Small Business Research report.