Case 40 Fresh Direct TN - Homework PDF

Preview

Summary

Homework...

Description

Teaching Note: Case 40 – Fresh Direct: Delivering the Goods? Case Objectives 1. To examine how external and internal forces affect competitive strategy. 2. To investigate how innovation and entrepreneurial strategies can be assets in a crowded industry. See the table below to determine where to use this case: Chapter Use

Key Concepts

2: External Environment

Industry competition five forces; general environmental factors

3: Internal Analysis

Value-chain analysis; resourcebased view of the firm; VRIN Competitive strategy; generic strategies Opportunity recognition; blue ocean strategy Innovation; sustaining vs. disruptive innovation; scope of innovation

5: Business Level Strategy 8: Entrepreneurial Strategies 12: Managing Innovation

Additional Reading and/or Exercises NOTE additional reading, web links to industry information

See Case DVD - also NOTE additional reading, web links

NOTE additional reading, web links, embedded video

Case Synopsis First launched in July 2001, FreshDirect was a New York City based on-line grocery store with a state of the art production center, top-notch personnel, leading edge manufacturing software, the highest standard of cleanliness, health & safety, and an informative and user-friendly website. System efficiencies included: a cost-effective operational design; no middleman; a central production and distribution location; well designed order and delivery protocols; and a policy of no slotting allowances. These system characteristics enabled FreshDirect to maintain a high product quality while keeping product prices low, therefore their promise to grocery shoppers of “higher quality at lower prices.” The ideal FreshDirect customer was described by Jason Ackerman, one of the founders, as someone who buys their bulk staples from a warehouse like Costco on a monthly basis, and buys everything else from FreshDirect on a weekly basis. The website offered a broad selection of products along with information about the food. Products could be compared on taste, price, usage and nutritional information. Custom cuts and seasonings of meat could be ordered. Delivery options included direct to the home in New York City, or office and train parking lot access in the suburbs. The on-line segment of the grocery industry was a small percentage of the industry total. Despite a large potential target audience, the on-line segment had been slow to catch on.

The total online sales in 2008 were $6.5 billion, and the numbers were expected to reach over $8.4 billion by 2010, but the five million people who shopped online for groceries still represented only 2 percent of the online population. FreshDirect’s competition came from traditional brick-and-mortar grocery chains and a handful of other on-line grocers in New York City. The challenge was to compete on price while covering the cost of packaging items in the warehouse and delivering individual grocery orders. With margins so small, in order to be successful, some analysts estimated that the online grocers had to do 10 times the volume of a traditional grocer. This increased the pressure on FreshDirect to differentiate itself from other online and traditional brick-and-mortar competitors and capture market share. As the online grocery market continued to define itself, FreshDirect’s challenge was to continue to innovate in product purchase, storage and distribution, and attract loyal customers while keeping costs down and quality up. Could FreshDirect maintain its market share among competition from both online and tradition grocers? Teaching Plan The FreshDirect case is a good way to demonstrate how innovation and entrepreneurial strategies can be essential to sustaining a competitive advantage in a crowded industry. Since this case discussion relies on a good understanding of how internal assets and the forces in the external environment drive competitive strategy, the instructor should position this case toward the end of the course, after students have had an opportunity to consider strategic analysis and formulation. ICEBREAKER Since probably all students have bought groceries, it might be illustrative to ask: How many of you would be willing to buy groceries online? Some students might be familiar with this concept, through a service in their area, but some will also be hesitant, especially about buying produce or fresh meat or fish – who picks out the ripest tomatoes for me? If students have difficulty visualizing this type of service, visit FreshDirect’s website to see a “photo tour” of their facility (you will have to provide a zip code to enter the site – click on “Visit Our Store” once you’ve done that): http://www.freshdirect.com/about/plant_tour/index.jsp The instructor might put a list on the board: what are the pros and cons of this approach to grocery shopping from the perspective of the customer? Ask students if they were going to be entrepreneurial and introduce a new sales and distribution method to this market, what might they have to consider? Delivery distance and cost? Customer service? Technology interface? This will put the students in a frame of mind where they can better appreciate the challenges faced by FreshDirect.

Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table to identify any additional readings and/or exercises so they can be assigned in advance. 1. What were key forces in the general and industry environments that affected FreshDirect? 2. What internal resources and assets did FreshDirect have that gave it a competitive advantage? 3. How did FreshDirect compete? 4. What innovations and entrepreneurial strategies did FreshDirect utilize to craft a competitive advantage? Discussion Questions and Responses 1. What were key forces in the general and industry environments that affected FreshDirect? Referencing Chapter 2: Analyzing the External Environment See the segments of the external competitive environment that include competitors, customers, and suppliers. Regarding the general external environment, FreshDirect must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to market its services and sustain sales. Political-Legal: State and city consumer & health regulations, labor issues (unions & undocumented workers) apply to all grocers; parking violations are unique to those that deliver. Economic: Concerns about the price of consumables drives many consumers to shop in bulk for the anticipated savings. Profit margins are tight, with product spoilage a major issue, so planning for customer demand is critical. Current gas prices make it hard to be competitive and profitable in the online grocery delivery business. Demographic: Rising levels of affluence may give the grocery industry a boost because families may have more discretionary dollars to spend on food, especially where they perceive an opportunity to get value/quality. If there’s a rise in the wealthy urban population, that makes it more likely for the direct delivery model to have appeal. However, an increasing immigrant population may mean a greater demand for “ethnic” foods, and cheaper foods bought in bulk to serve larger families.

Sociocultural: A greater concern for healthy diets and physical fitness increases the desire for “fresher”, higher quality produce. Customers can also save valuable time by shopping online and not having to drive very far (or at all) to pick up groceries. An increasing interest in “organic” produce and meat means opportunities for these niche providers, however customers with an interest in these foods may like to interact directly with the producer or grower if possible. Technological: Developments in technology and new uses for existing technologies can help create storage and distribution opportunities for fresh produce and meat. Also, the growth of the Internet makes an online offering available to a wider customer base. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. See Exhibit 2.7.

Suggested: It is hard to create a competitive structure, so the current rivalry is very high for established chains that choose to compete online with economies of scale.

Suppliers’ Power High

Substitutes Threat High

Rivalry Very High

Suggested: High – especially for produce and meat, since environmental and market factors determine price Suggested: Low barriers to entry, especially for those established grocery chain and warehouse operations that are willing to absorb the high online start-up and operating costs.

Threat of New Entrants High

Suggested: the brick and mortar grocery store and warehouse chain is the major substitute to online grocery shopping.

Buyers’ Power Med Suggested: Consumers do not have much price negotiating power except in the area of delivery services, but it’s much easier to compare prices and service online so switching to another online grocer is easier

Based on the external environmental factor analysis, although there are not many rivals, the online grocery industry has many challenges to profitability. The fact that this business model is also still fairly new, and may not have progressed much past the “early adopter” phase of consumer acceptance, also means considerable risk of entry. This may explain why there are so few players in the online variant of the grocery business.

NOTE – ADDITIONAL WEB LINKS TO INDUSTRY INFORMATION: An article from March of 2009 explains how customers choose where to shop for food in the current economic environment – convenient location, low price, and managing the time it takes to shop are top considerations: http://www.progressivegrocer.com/progressivegrocer/content_display/esearch/e3iafdb4ca fada99f43cf41472d6b64899a Does this mean that an online grocery shopping solution makes more sense in this environment? From 2006, here’s a report on the state of online grocery shopping. Although many retailers jumped on the Internet bandwagon, not all of them were able to sustain their online businesses - “it's clearer today than ever that retailers have to be willing to make considerable investments before shoppers will reciprocate.” The article suggests that the “pure” players, those companies that work out of warehouses and don’t have a brick-andmortar equivalent (as of 2006 this meant Fresh Direct, Peapod, and SimonDelivers), are the ones with the most innovative ideas: http://www.progressivegrocer.com/progressivegrocer/esearch/article_display.jsp? vnu_content_id=1002950499 From May 2009, here’s an interview with Fresh Direct’s Chief Marketing Officer Steve Druckman, explaining how his company has succeeded where other online grocers failed. The interview mentions competition from Amazon, online, and Whole Foods, in store: http://www.perishablepundit.com/index.php?date=05/22/09&pundit=2 Fresh Direct had problems in 2008, not only labor problems with union activity and charges that it hired undocumented workers, but a change in leadership. Now in May of 2009, it reports stronger sales: http://www.crainsnewyork.com/article/20090531/FREE/305319995 What appear to be the key external and internal issues that online grocers need to pay attention to? 2. What internal resources and assets did FreshDirect have that gave it a competitive advantage? Referencing Chapter 3: Analyzing the Internal Environment When one firm tries to outperform others, it’s important to figure out how this could be done. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in FreshDirect’s value chain. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, FreshDirect can make a choice of how to proceed to craft a competitive advantage.

A sample value chain analysis is below: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient work flow design, quality control systems) Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated sales people, innovative advertising & promotion, effective pricing, proper ID of customer segments & distribution channels)

Service (ability to solicit customer feedback & respond)

Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware & software, innovative culture & qualified personnel) Human resource management (effective recruitment, incentive & retention mechanisms) General Administration

How did FreshDirect create value for the customer? Instead of going through an intermediary, FreshDirect bought directly from growers and producers, thereby had reduced pricing and high quality product. Investment in a state-of-the-art production facility meant cost-effective, efficient and quality controlled systems to maintain high standards of cleanliness, health and safety. Location of the production facility near to Manhattan reduced delivery time. Scheduling of delivery times to avoid peak traffic times further reduced delivery costs. Minimum delivery charges may have to change based on fuel costs, and can be a barrier to growth. FreshDirect made a decision to use imaginative advertising, word of mouth and innovative offers to first-time customers. The website design and customer interface will be crucial in converting browsers into customers. Customers cannot put their hands on the product to touch, sniff and weigh, which is a major barrier. Possibility for impulse buy is greatly reduced online. Information on food nutrition, preparation, price comparison was much more available online, provided an added service to the customer and facilitating comparison shopping. Since the product was delivered to the customer, there was no direct feedback except through the driver. Mechanisms for soliciting feedback were not obvious. The online environment allows for such feedback, but was FreshDirect set up to respond? What about product returns and refunds? Industry-wide high product costs affected product pricing and profit margins. Decision to use state-of-the-art technology to design the production and distribution network meant it may be possible to maintain better quality control than competitors. Decision to hire product experts and use company drivers for distribution allowed managers to keep control of employee performance. Founders Joe Fedele and Jason Ackerman had direct

(effective planning systems to establish goals & strategies, access to capital, effective top management communication, relationships with diverse stakeholders)

experience in this market. Current management appeared passionate about the business, willing to learn from mistakes.

In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Look at resources that are controlled by FreshDirect that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: Private investors and a training grant from the State of New York Physical: New production and distribution facilities Technological: Production and distribution facilities designed specifically for the product to maintain product safety and freshness Organizational: Other than the initial energy and drive required to start and grow the company to this level, there were no obvious value-creating organization resources Intangible Resources: Human: Expert staffing in production areas, company drivers allowed control of distribution Innovation and creativity: The founders’ background and innovative ability Reputation: Online hard to tell, but founder Joe Fedele’s success with the brick-andmortar Fairway Uptown supermarket in Harlem had to have some carrying power Organizational Capabilities: Specific Competencies or Skills: Entrepreneurial mindset and experience, technological capability

Capacity to combine resources: Innovative product marketing and distribution could have implications for future diversification Applying the VRIN concept, FreshDirect did have valuable activities and resources: operations, outbound logistics, marketing and sales, technology development and general administration all appeared to provide a competitive edge. The operations and outbound logistics models appeared rare so far, although they would have been easy to copy if a rival wanted to make the investment. The innovation and creativity of current administration may be difficult to imitate, because of the path dependency and social complexity of the relationships built up between founders, upper management, celebrities and chefs, and local suppliers. There are also few substitutes for this kind of innovation. All this means FreshDirect may have had a unique bundle of activities and resources that could provide the basis for a sustainable competitive advantage. 3. How did Fresh Direct compete? Referencing Chapter 5: Formulating Business-Level Strategies A competitive strategy is linked to the value chain, and supported by intangible assets. Activities and assets allow Fresh Direct to create products that are unique and valuable to customers. See the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage:  Overall cost leadership o Low-cost-position relative to a firm’s peers o Manage relationships throughout the entire value chain  Differentiation o Create products and/or services that are unique and valued o Non-price attributes for which customers will pay a premium  Focus strategy o Narrow product lines, buyer segments, or targeted geographic markets o Attain advantages either through differentiation or cost leadership Cost Leadership: Because of its innovative relationships with producers and growers, and its efficient production and distribution systems, FreshDirect had the ability to create a cost leadership strategy. However, its operational model could be easily imitated, especially by the big chains with deep pockets. Moreover, in early 2007, New York City government proposed a congestion charge for traffic entering Manhattan, adding to FreshDirect’s delivery expenses. The rising cost of fuel and environmental concerms were also a potential threat to the low-cost strategy. Also, with the online access came the ability for the customer to comparison shop much more easily, and therefore switch “with a mouse click.” Differentiation: The challenge of differentiation is to create a product that is perceived industry wide as being unique and valued by customers so much so that they will seek it

out if not readily available. FreshDirect’s strategy of providing extra information about the meats and produce, and promoting the freshness and quality of their offerings should help differentiate it in the online grocery market. Focus: It’s possible to argue that FreshDirect had a focus strategy with the produce and meat segment, especially since Ackerman acknowledged FreshDirect did not intend to compete with the warehouse chains like Costco. However, it would be hard to keep a narrow e...