Question

What internal resources and assets did FreshDirect have that gave it a competitive advantage?

Case 9 FreshDirect, "How Fresh is it"

Answer 1

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	How did FreshDirect create value for the customer?
Primary:
Inbound logistics (distribution facilities, material control systems, warehouse layouts)	Instead of going through an intermediary, FreshDirect bought directly from growers and producers, thereby had reduced pricing and high quality product.
Operations (efficient work flow design, quality control systems)	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.
Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing)	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.
Marketing and Sales (motivated sales people, innovative advertising & promotion, effective pricing, proper ID of customer segments & distribution channels)	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.
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 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?
Secondary (or support):
Procurement (win-win relationships with suppliers, reduced dependence on single supplier)	Industry-wide high product costs affected product pricing and profit margins.
Technology development (state of the art hardware & software, innovative culture & qualified personnel)	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.
Human resource management (effective recruitment, incentive & retention mechanisms)	Decision to hire product experts and use company drivers for distribution allowed managers to keep control of employee performance.
General Administration (effective planning systems to establish goals & strategies, access to capital, effective top management communication, relationships with diverse stakeholders)	Founders Joe Fedele and Jason Ackerman had direct 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.

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-and-mortar 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.

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