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Strategic Analysis in Fresh Direct

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    This case can be used to augment discussions of strategic analysis, specifically both internal and external environmental analysis (Chapters 2 & 3 in Dies, Limpkin & Eisner); and strategic formulation, specifically business level strategy (Chapter 5), and e- equines (Chapter 8), with an additional focus on strategic implementation, specifically entrepreneurial development (Chapters 12 & 13). The case moves students towards two specific questions.

    First, there is the question of how Fresh Direct has used industry analysis to examine their industry general environment plus the competitive impact of suppliers, buyers, threats of new entry, substitutes and rivalry. Second, based on this strategic analysis, is an assessment of Fresh Directs choice of a competitive e- business strategy: 1) differentiation within the grocery industry based on revive quality, and 2) cost leadership in their warehouse operations.

    Overlaying these basic questions is the nature of the entrepreneurial environment and to what degree the Freeholders owners are capitalizing on their resources, expertise and entrepreneurial ambition. The case is written in a style that overviews the situation but intentionally avoids guiding students through any analytical framework or specific application question. In so doing, it provides the instructor with the latitude to adjust class discussion and thereby accommodate the abilities of a wide range of students.

    Specifically, the instructor can invite students to reason through a situation where uncertainty exists and speculation may be required. In terms of environmental analysis, this case connects a discussion of external environmental forces and Porter’s five-force model, and how such forces affect the opportunities for growth in an industry (referencing concepts covered in Chapter 2). In terms of internal analysis of the firm, (referencing Chapter 3), the value-chain and resource-based FRI. analysis provides a case for how distribution challenges across the value-chain activities could affect value.

    As a business-level strategy case, (referencing concepts covered in Chapter 5), this case is very well suited to discuss the Porters generic strategies, the advantages and disadvantages of those strategies and to discuss the merits and demerits of a combination e-business strategy (referencing concepts from Chapter 8). Specific to the entrepreneurial challenges, the instructor also has the latitude to discuss the prospects and problems that the firm would encounter in future in its growth endeavor.

    This could involve a discussion on the various avenues of growth, the feasibility of the avenues, possible competitor action and how the company could cope with it. This case can be used to demonstrate the difficulty of introducing a new product to an already established market, the challenges of being a new player in a new market, and the challenges of expansion for a specialized product. The instructor is free to choose the concepts to highlight from Chapters 12 and 13.

    Synopsis First launched in July 2001 , Freeholders is 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, lath & safety, and an informative and user-friendly website. System efficiencies include: 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 enTABLE Freeholders 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 Fresh Direct customer is described by Jason Ackerman, one of the founders, as someone who buys their bulk staples from a warehouse like Cost on a monthly basis, and buys everything else from Freeholders on a weekly basis. The website offers a broad selection of products along with information about the food and how it is sold.

    Products can be compared on taste, price, usage and nutritional information. Custom cuts and seasonings of meat can be ordered. Delivery options include 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 is a small percentage of the industry total. Despite a large potential target audience, the on-line segment has been slow to catch on. This could be due to low customer satisfaction with existing on-line grocers and the prevalence Of price-sensitive shoppers.

    Estimates from industry analysts are that consumers will become more likely to shop online in the future, and may become more loyal to their electronic supermarkets, taking advantage of online offered coupons and premiums. Fresh Directs competition comes from traditional brick-and-mortar grocery chains and a handful of other on-line grocers in New York City. The challenge is to compete on price while covering the cost of selecting items in the store and delivering individual grocery orders. With margins so small, in order to be successful, some analysts estimate that the online grocers have to do 1 0 times the volume of a traditional grocer.

    This increases the pressure on Freeholders to differentiate itself from other online and traditional brick-and- mortar competitors and capture market share. Other online competitors such as Yourself. Com, Peapod and Montenegro have all reconfigured their models or formed alliances or been acquired by larger chains. As the online grocery market continues to define itself, Frederic’s challenge is to continue to innovate in product purchase, outrage and distribution, and attract loyal customers while keeping costs down and quality up. The challenge to the class is to see what insight they may have to offer.

    Teaching Plans The instructor may choose to assign the case to groups Of 4-5 students to discuss and present on each of the three broad focus areas: environmental analysis, business strategy and entrepreneurial development. The discussion points and answers provided below therefore provide a broad overview for the discussion in class. Instructors, however, should engage in their own analysis to guide the discussion, and should encourage students to expand heir answers based on their own unique experiences. Environmental Analysis Discussion Points Icebreaker Question: How many of you would be willing to try buying groceries online?

    This initial question can get students thinking about their experiences with the industry. How willing are they to experiment with buying groceries online? From the perspective of the consumer, what are the pros and cons of this approach to grocery shopping? If they were going to be entrepreneurial and introduce a new sales and distribution method to this market, what might they have to consider? Question (Chapter 2: General Environment): Analyze Frothiness’s external environment. What are the general environmental factors that have impact on the grocery industry?

    This case presents an opportunity to drive home the point that stronger industry-wide forces may either enhance or drive down industry profitability. See which factors in the general environment students might pick that have a significant impact on the grocery industry. Some of the students’ answers might include: Demographic: Rising levels of affluence may give the grocery industry a boost because families may have more discretionary dollars to spend on food, specially where they perceive an opportunity to get value/quality. If there’s a rise in 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. Coloratura: A greater concern for healthy diets and physical fitness increases the desire for “fresher”, higher quality produce. Customers can also save valuTABLE 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 availTABLE to a wider customer base. Economic: Concerns about the price of consumTABLEs 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.

    Question (Chapter 2: Competitive Forces): What are the external forces of competition affecting the grocery industry? Help students apply Michael Porters 5 Forces of Competition by drawing a diagram on the board similar to the following, and have students fill in the details: Based on the external environmental factor analysis, would students suggest starting up an online grocery offering at this time? Question (Chapter 3): Analyze Frothiness’s internal environment. What does the Freeholders value chain kick like? What about its resources?

    What internal challenges does it have to overcome? The instructor can make use of Porter’s value chain analysis and also introduce the students to analysis from a resource-based perspective. The limitations of SOOT analysis in directing attention to the bases of competitive advantage, and the merits of the other two approaches can be driven-home with such an analysis. Ask students after doing the value chain and resource- based analysis if they think a simple SOOT would have adequately uncovered the relationships identified here. A sample analysis is presented below.

    Instructors can also give students blank arms similar to the ones below, and have students fill them in as homework prior to class discussion. Value chain activity How does Freeholders create value for the customer? What challenges does Freeholders have in its value chain? Primary: Inbound logistics Instead of going through an intermediary, Freeholders buys directly from growers and producers, thereby getting reduced pricing and high quality product. Operations Investment in a state-of-the-art production facility means cost-effective, efficient and quality controlled systems to maintain high standards of cleanliness, health and safety.

    Outbound logistics Location of the production facility near to Manhattan reduces delivery time. Scheduling of delivery times to avoid peak traffic times further reduces delivery costs. Minimum delivery charges may have to change based on fuel costs, and can be a barrier to growth. Marketing and Sales Freeholders 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. Service Information on food nutrition, preparation, price comparison is much more availTABLE online, provided an added service to the customer and facilitating comparison shopping. Since the product is delivered to the customer, there is no direct feedback except through the driver. Mechanisms for soliciting feedback are not obvious. The online environment allows for such feedback, but is Freeholders set up to respond? What about product returns and refunds? Secondary: Procurement Industry-wide high product costs affect product pricing and profit margins. Technology development.

    Decision to use state-of-the-art technology to design the production and distribution network means it may be possible to maintain better quality control than competitors. Human resource management Decision to hire product experts and use company drivers for distribution allows owners to keep control of employee performance. General Administration Founders Joe Fiddle and Jason Ackerman have direct experience in this market, and appear to be moving slowly and carefully to expand. The instructor can ask students to further identify and discuss the interrelationships among the various activities in the value-chain.

    Do any of the activities that are unique to the online business add a significant value over the brick-and-mortar grocery store? See what the students come up with. A sample analysis is also presented below using the resource-based approach. Look at resources that are controlled by a firm that might enTABLE 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 are no obvious value-creating organization resources Intangible Resources: Human: Expert staffing in production areas, company drivers allow control of distribution Innovation and creativity: The founders’ background and innovative ability Reputation: Online hard to tell, but founder Joe Fiddle’s success with the Rick-and-mortar Fairway Uptown supermarket in Harlem has 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 There can be great divergence in how various groups WOUld mark these resources as valuTABLE, rare, inimiTABLE and non-substituTABLE. The instructor will probably be TABLE to engage the students in debate and encourage discussion as to whether or not the individual value chain activities, or interactions between them, can lead to advantages that are sustainTABLE. That would help drive home the idea of ‘unique bundles of activities/resources’ as the basis of sustainTABLE competitive advantage much more strongly.

    Possible responses are listed below: Resource/Activity Is it ValuTABLE? (V) Is it rare? Is it difficult to imitate? (l) Are there few substitutes? (N) No NO Operations Yes Yes, so far Outbound logistics Marketing and sales Technology development Human resource management General administration Maybe In what way does the internal assessment help students make a decision bout whether or not they would choose to enter the online grocery business at this time? Business Strategy Question (Chapter 5 – Competitive Strategy; Chapter 8 – E-Business Strategy): What business level strategy does Freeholders appear to pursue? What niche (cost, differentiation, focus) can Freeholders fill in the online grocery industry?

    Porters three generic competitive strategies that a firm can use to overcome the five forces and achieve competitive advantage are listed below. Encourage students to develop their own ideas, using information gained from the discussion of the internal and external environment; they should specially consider the value chain when assessing a differentiation strategy. Ask the students which strategy they think Freeholders is currently pursuing, is this strategy sustainTABLE, and why. Their answers may include some of the following points: Cost Leadership: Because of their innovative relationships with producers and growers, and their efficient production and distribution systems, Fresh Direct has the ability to create a cost leadership strategy.

    However, their operational model can be easily imitated, especially by the big chains with deep pockets. Also, with the online access comes the ability for the customer to comparison hop much more easily, and therefore switch “with a mouse click. ” Differentiation: The challenge of differentiation is to create a product that is perceived industries as being unique and valued by customers so much so that they will seek it out if not readily availTABLE. Fresh Directs strategy of providing extra information about the meats and produce, and promoting the freshness and quality of their offerings should help differentiate them in the online grocery market.

    Focus: It’s possible to argue that Freeholders has a focus strategy with the produce and meat segment, especially since Ackerman acknowledges Freeholders does not intend to compete with the warehouse chains like Cost, however, it would be hard to keep a narrow enough focus to gain a true competitive edge for long given all the other produce and meat specialists in brick-and-mortar.

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