978-1259278211 Case 30 Solution Manual Part 1

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Teaching Note: Case 30 – FreshDirect: Is It Really Fresh?

Case Objectives

1. To investigate how to compete in a crowded industry.

See the table below to determine where to use this case:

Note: Although this case is best positioned as a business and entrepreneurial strategy case, it can

be used to illustrate almost all of the other chapter concepts, therefore becoming a

Chapter Use Key Concepts Additional Reading and/or

Exercises

1: Strategy Concept Strategic management

2: External

Industry competition five forces;

NOTE additional reading, web

3: Internal Analysis Value-chain analysis; resource-based

4: Intellectual Assets Intellectual, human & social capital

5: Business Level

Competitive strategy; generic

NOTE additional reading, web

8: Entrepreneurial

Strategy

Opportunity recognition

9: Strategic Control Informational vs. behavioral control

10: Organizational

Design

Organizational structure

Leadership

Innovation

Case Synopsis

First launched in July 2001, FreshDirect was a New York City based online 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.

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

Early on the online 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

FreshDirect’s competition came from traditional brick-and-mortar grocery chains and a handful

of other online grocers in New York City. The challenge was to compete on price while covering

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

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

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. You may have to provide a zip code to enter the site (try using Pace University’s lower

Manhattan zip code 10038):

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

Before engaging in discussion, you might want to test student’s basic knowledge regarding the

Which of the following statements is most true?

a. 70% of New Yorkers cook from scratch multiple times a week.

b. FreshDirect is a subsidiary of Fairway Supermarkets.

c. FreshDirect contracts out its delivery service to save on operational expense.

d. FreshDirect has had four CEOs since its founding.

ANSWER: a. About 70 percent of New Yorkers cook from scratch multiple times a week, and 30

percent cook multiple times a day. FreshDirect co-founder Joseph Fedele was also a co-founder

Normal supermarkets carry about 5,000 perishable products, while FreshDirect focuses on only

about 2,200.

a. Yes

b. No

ANSWER: b. A typical grocery store carried about 25,000 packaged goods, which accounted for

approximately 50 percent of its sales, and about 2,200 perishable products, which accounted for

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. How did FreshDirect use strategic management, and 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 competitive dynamics affect FreshDirect now?

Discussion Questions and Responses

1. How did FreshDirect use strategic management, and what were key forces in the

general and industry environments that affected FreshDirect?

To start with, the instructor might want to position the discussion by reviewing what strategic

management really is:

Referencing Chapter 1: Strategic Management

Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter

1, Exhibit 01: Strategic management consists of the analyses, decisions, and actions an

organization undertakes in order to create and sustain competitive advantages:

●strategy directs the organization toward overall goals and objectives;

●includes multiple stakeholders in decision making;

Leaders face a large number of complex challenges. Leaders must be proactive, anticipate

change and continually refine changes to their strategies. This requires a certain level of

During strategic analysis, the leader does “advance work” to anticipate unforeseen

environmental developments, identify unanticipated resource constraints,and assess changes in

In strategy implementation, depending on the type of organization structure, the leader might

include key individuals in a discussion around selecting which strategies might be best to

implement at which level within the organization. The leader must ensure proper strategic

The basic question strategic management tries to answer is: How can we create competitive

advantages in the marketplace that are not only unique and valuable but also difficult for

competitors to copy or substitute?

An interesting question we can ask at this point is: what IS that “marketplace”? What business

is FreshDirect in? Some might say groceries, but some might say online retail or product

delivery. The answers to this question will help us understand the importance of vision and

Given FreshDirect’s roots in the “fresh” produce business, AND its decision to provide the

online interface, it could be considered to be in the online grocery business. Answering this

Referencing Chapter 2: Analyzing the External Environment of the Firm

Organizational leaders must become aware of factors in the overall environment that might affect

their ability to create a competitive advantage. So how do managers become environmentally

Environmental scanning involves surveillance of a firm’s external environment to predict

environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint

Environmental monitoring is a firm’s analysis of the external environment that tracks the

evolution of environmental trends, sequences of events, or streams of activities. Leaders need to

What factors or trends might be most important to FreshDirect? To assess how the external

environment might affect FreshDirect’s strategy, it’s necessary to take a look at the factors in the

Political-Legal: State and city consumer & health regulations, labor issues (unions &

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

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

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

Technological: Developments in technology and new uses for existing technologies can help

It’s also necessary to assess the segments of the external competitive environment that include

Rivalry

Very High

Substitutes

Buyers’

Power

Med

Suppliers’

Power

High

Suggested: It is hard to create

a competitive structure, so the

Suggested:

negotiating power

Suggested: High – especially

for produce and meat, since

Suggested: the brick and

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

NOTE – ADDITIONAL WEB LINKS TO INDUSTRY INFORMATION:

An article from July of 2011 explains customers’ key concerns: higher prices, shrinking package

sizes, gas prices reducing trips to the store, concern over product nutritional labeling, demand for

healthier food options; and an increasing number of shoppers using mobile devices to check

From 2014, here’s one opinion about how the digital shopper is changing the competitive

landscape: “The desire for same-day, on-demand grocery delivery is rapidly growing and

services like Google’s Shopping Express, AmazonFresh and Uber’s Corner Store have quickly

stepped in to fill the gap. These services create yet another fragment on the shopper’s path to

purchase – expectations are mounting for retailers to possess the capability to get food and other

grocery items to their doorstep at a moment’s notice. While currently only operating in certain

cities across the U.S., the convenience grocery delivery services offer will certainly fuel their

popularity…. [In addition] 54 percent of online consumers use social media to discover new

foods and share food experiences. What’s for dinner is decided hours before the actual meal and

often by visiting a social site such as Pinterest. In fact, curated Pinterest boards have rapidly

become the modern recipe box.” See more at:

http://www.progressivegrocer.com/departments/technology/five-new-ways-reach-today

%E2%80%99s-digital-shopper?nopaging=1#sthash.Fl7pUpCw.dpuf

These appear to be opportunities for online grocery stores. Does this mean that an online grocery

shopping solution makes more sense in this environment?

Data from 2012 indicated that online grocery sales represented less than 1 percent of the $850

million in U.S. food retail sales, but experts expect the segment to grow 9.5 percent annually, to

reach $9.4 billion in 2017. Citi analyst Deborah Weinswig said the top three online grocers

currently are Royal Ahold’s Peapod with 8.8 percent of the market, FreshDirect with 5.7 percent

and Safeway with 3.2 percent of the market. See http://www.retailleader.net/top-story-

industry_news-online_grocery_sales_to_grow_9.5__annually_from_small_base-2363.html

According to one report in 2013, “the battle between traditional brick-and-mortar grocery and

alternate channels was heating up, with analysts and pundits trying their best to predict who will

control the market in the future. Meanwhile, consumers are reaping the benefits of at-home

delivery services in the digital world and a store perimeter rich with fresh, healthy, ready-to-eat

products in the ‘real’ world. In fact, some say fresh food might be the single most important

Regarding direct competition, Stop & Shop’s Peapod started providing delivery in Manhattan in

March of 2011 (see http://www.nytimes.com/2011/03/12/nyregion/12peapod.html for the full

story), and it appears Wal-Mart may be entering the online grocery delivery service with a test in

Go to http://gothamist.com/tags/freshdirect and search for news in the NYC area about current

issues related to FreshDirect. Some are surprising, including a lawsuit intended to stop

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 of the Firm

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

Remember, value chain analysis is a strategic analysis of an organization that uses value-creating

activities. Value is the amount that buyers are willing to pay for what a firm provides them and is

Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities.

A sample value chain analysis is below:

Value chain activity How did FreshDirect create value for the customer?

Primary:

Inbound logistics (distribution

Instead of going through an intermediary, FreshDirect

Operations (efficient work flow

design, quality control systems)

Investment in a state-of-the-art production facility

meant cost-effective, efficient and quality controlled

Outbound logistics

(consolidation of goods, efficient

Location of the production facility near to Manhattan

reduced delivery time. Scheduling of delivery times to

Marketing and Sales (motivated

sales people, innovative

FreshDirect made a decision to use imaginative

advertising, word of mouth and innovative offers to

Service (ability to solicit

customer feedback & respond)

Information on food nutrition, preparation, price

comparison was much more available online, provided

an added service to the customer and facilitating

were not obvious. The online environment allows for

such feedback, but was FreshDirect set up to respond?

What about product returns and refunds?

Secondary (or support):

Procurement (win-win

reduced dependence on single

supplier)

Industry-wide high product costs affected product

Technology development (state

of the art hardware & software,

Decision to use state-of-the-art technology to design the

production and distribution network meant it may be

Human resource management

Decision to hire product experts and use company

General Administration

Founders Joe Fedele and Jason Ackerman had direct

establish goals & strategies,

management communication,

relationships with diverse

stakeholders)

appeared passionate about the business, willing to learn

Primary Activities

In terms of primary activities, the key to FreshDirect’s ability to differentiate itself in the market

resided in its operations and marketing. The operation was designed from the beginning to

Support Activities

With regards to support activities, a competitive advantage is achieved by developing a strong

general administration that is built around visionary leadership and a culture that pushes for

technological innovation. Although FreshDirect had this in the beginning, there had been some

mistakes. Was current leadership stable enough to learn from those 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. A firm’s

strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a

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: Up-to-date production and distribution facilities

Technological: Production and distribution facilities designed specifically for the product to