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HBS Senior Fellow David L. Ager and Michael A. Roberto, Trustee Professor of Management at Bryant University, prepared this case. This case
was developed from published sources. Funding for the development of this case was provided by Harvard Business School, and not by the
company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary
data, or illustrations of effective or ineffective management.

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D A V I D L . A G E R

M I C H A E L A . R O B E R T O

Trader Joe’s

In July 2013, Market Force Information released the results of a new study in which over 6,000
Americans ranked their favorite supermarkets in a variety of categories. Trader Joe’s ranked No. 1
overall.1 Consumer Reports ranked Trader Joe’s the second-best supermarket in the country in 2012.2

One year earlier, Fast Company named Trader Joe’s the 11th most innovative firm in the U.S.3

Hundreds of people waited in line for the doors to open on March 22, 2013 at the grand opening
of Trader Joe’s in Columbia, South Carolina. Local police directed traffic, and people hunted for
parking at nearby businesses because they couldn’t find a spot in Trader Joe’s parking lot.4
Customers arrived at 3:00 a.m. on June 29, 2012, to line up for the opening of a new Trader Joe’s in
Lexington, Kentucky.5 That same scene played out at new store openings around the country. Job
seekers flooded the firm with applications when they learned of a new store. Meanwhile, retail
experts marveled that the quirky grocer generated much higher sales per square foot than any of its
rivals.

With all that success, Trader Joe’s had attracted imitators. Tesco, the world’s third-largest retailer,
had launched a chain of small neighborhood markets in the western United States. The British firm
appeared to borrow extensively from the Trader Joe’s concept with its Fresh & Easy stores. In April
2013, Tesco announced that it was withdrawing from the U.S. market, hoping to find a buyer for its
approximately 200 stores. The British retailer recorded a $1.8 billion loss associated with its failure in
the U.S. market.6

Tesco’s troubles did not discourage other retailers from introducing smaller-footprint stores. Wal-
Mart, the world’s largest retailer, had experimented with its Neighborhood Markets concept since
1998. These smaller grocery stores differed from traditional Wal-Mart supercenters in size and
product variety. They were roughly 38,000 square feet in size and only offered grocery and pharmacy
items. The Neighborhood Markets concept had evolved over the years and recently began to show
promising results. In 2011 the firm launched Wal-Mart Express, a 12,000–15,000-square-foot store that
the company described as a “bit of a hybrid between a food, pharmacy and convenience store.” The

first 10 stores turned profitable in one year.7

In May 2013, Wal-Mart announced strong comparable store sales growth at these smaller
locations, and the firm indicated that 40% of new store openings over the next year would come in
the small-format category. In 2013, it planned to open over 100 small-format stores. The head of Wal-
Mart’s U.S. business, Bill Simon, declared at an industry conference, “You’ll see us increasingly

moving into smaller formats. They compete really well against multiple channels.”8 Many other

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retailers, including Target, Kroger, Giant, Tops, and Publix, had launched smaller-format
experiments as well. Meanwhile, Amazon continued to make a push into the grocery business. In
June 2013, Amazon expanded its online grocery service outside of Seattle for the first time, with an
entry into the Los Angeles market. Experts predicted that Amazon would introduce the service in San
Francisco later in the year and as many as 20 additional cities in 2014.9 As the onslaught of new
competition emerged, Trader Joe’s had to consider how it might adapt to cope with these threats.

Company History

Joe Coulombe grew up in San Diego, California during the Great Depression. After completing his
MBA at Stanford in 1954, Coulombe took a job with Rexall, a North American drugstore chain. While
working there, he launched a convenience store chain called Pronto Markets in 1958. Coulombe
eventually acquired the small chain from Rexall and branched out on his own. He secured financing
from Adohr Milk Farms. However, 7-Eleven acquired Adohr Milk Farms in 1965. The dominant
player in the convenience store industry now owned Coulombe’s source of capital, which he found
untenable. Coulombe shifted his strategy and founded Trader Joe’s in 1967. He explained the origins
of the concept:

Scientific American had a story that of all people qualified to go to college, 60% were going.
I felt this newly educated—not smarter but better-educated—class of people would want
something different, and that was the genesis of Trader Joe’s. All Trader Joe’s were located
near centers of learning. Pasadena, where I opened the first one, was because Pasadena is the
epitome of a well-educated town. I reframed this: Trader Joe’s is for overeducated and
underpaid people, for all the classical musicians, museum curators, journalists—that’s why

we’ve always had good press, frankly!10

Trader Joe’s offered products aimed at the sophisticated consumer interested in finding good
bargains. The store tried to offer products (such as whole-bean coffees, sprouted wheat bread, and
black rice) not typically found at supermarkets. The environmental movement had caught
Coulombe’s eye during those early years, which prompted him to sell many natural and organic
foods. Soon the company began offering private label items. The first private label product, granola,

launched in 1972.11 In the ensuing years, Trader Joe’s offered an extensive line of private label items
with brand names such as Trader Joe’s, Trader Ming’s, Trader Jose, Trader Giotto, and the like.
Interestingly, Coulombe also experimented with a variety of nonfood items, ranging from music
albums to pantyhose. In addition, trying to cater to the educated, sophisticated customer, Coulombe
chose to offer a wide selection of California wines. The wine became a focal point in the ensuing
years, while the albums and pantyhose disappeared from the store’s shelves.

The stores tended to be quite small, less than 10,000 square feet in many cases. Trader Joe’s
stocked far fewer items than a typical supermarket. All of its stores adopted a South Seas theme:
Coulombe remembered, “I read that the 747 [Boeing jumbo jet] would radically reduce the cost of
travel, and I came up with the term ‘Trader’ to evoke the South Seas. The first stores were loaded
with marine artifacts.”12 Coulombe also outfitted the employees with Hawaiian shirts. The store
manager became known as the “Captain” of that location, with a “First Mate” serving as his or her
assistant.

Coulombe believed strongly in paying employees a good wage. He decided that his average full-
time employee should earn the median family income for the state of California—$7,000 per year at
the time the company was founded. He said, “What I keep telling people [is] forget about the

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merchandise; it’s the quality of the people in the stores.”13 He took great pride in the fact that many
employees loved working there and stayed for years.

The company eschewed traditional supermarket advertising, such as coupon-filled circulars in the
Sunday newspaper or television commercials. Instead, it distributed a customer newsletter, which
came to be known as the “Fearless Flyer.” The newsletter provided information on certain products
and introduced new items. It did not offer sales and promotions, however. Instead, the company
embraced an “everyday low-pricing” philosophy. Coulombe also recorded many short radio ads in
which he would tell behind-the-scenes stories about various products. Early commercials were
broadcast on KFAC, a classical music station based in Los Angeles.14

The Aldi acquisition Coulombe pursued a very deliberate growth strategy: during his 20-
year tenure as CEO, he typically opened roughly one store per year. He did so without ever straying
from the Southern California region. In 1979, German grocer Theo Albrecht, who owned one of
Germany’s most successful grocery chains—Aldi North—became enamored with the Trader Joe’s
concept, and acquired the company. Coulombe agreed to remain as CEO, a position he held until
1988. Albrecht ran a lean low-cost operation with minimal overhead. His discount grocery stores bore
a strong resemblance to the Trader Joe’s business model, minus the South Seas theme and a concerted
focus on cultured, urbane consumers. Aldi North sold mostly private label goods at low prices,
stocked far fewer items than a typical supermarket, and maintained a fairly small footprint. It also
carried a small amount of fresh fruits and vegetables. Theo’s brother, Karl, owned a sister chain, Aldi
Sud, which would eventually open small-footprint discount grocery stores in the United States. As of

July 2013, Aldi Sud operated over 1,000 stores across 31 states.15 Together, the two Aldi chains

operated roughly 10,000 stores around the globe.16 Many experts attributed Wal-Mart’s exit from the
German market in 2006 to its failure to match Aldi’s combination of merchandising prowess and
operational efficiency.

Albrecht gave Coulombe a great deal of autonomy to continue running Trader Joe’s as he wished,
and executives from Germany visited the Trader Joe’s headquarters in California only once per year.
However, Trader Joe’s adopted Albrecht’s obsession with secrecy. Theo and Karl Albrecht
maintained very private lives—so much so that German newspapers had a difficult time finding a
photograph of Theo when he died in 2010.17 Consistent with Albrecht’s philosophy, Trader Joe’s did
not have signs with the company’s name or logo at its headquarters in Monrovia, California. Further,
company executives almost never talked to the media. And the company’s website remained very
simple, with little information about the company’s strategy, leadership team, or financial success.

The site did not even have a timeline of the firm’s history until 2009.18

New leadership Coulombe stepped down as CEO in 1988 and was replaced by fellow

Stanford graduate John Shields. Under the new CEO’s leadership, Trader Joe’s expanded beyond its
Southern California base. The company opened its first locations in Northern California in 1988, and
expanded to Arizona in 1993. The next big move entailed the opening of locations on the East Coast.
Trader Joe’s chose Brookline, Massachusetts—a suburb of Boston—as the site of its first East Coast

store.19 The Boston area, of course, had more universities than virtually any metropolitan area in the
country.20

Trader Joe’s began selling its now-famous private label wines in 2002. The wines—sold under the
brand name Charles Shaw Winery—became a huge hit with customers. They affixed the name “Two
Buck Chuck” to the wine, because it sold for $1.99 per bottle in California ($2.99 on the East Coast).

Soon, Charles Shaw wines had become a classic example of “cheap chic.”21

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Trader Joe’s expanded to the Midwest in 2000, opening stores in the Chicago area. On St. Patrick’s
Day in 2006, the company opened its first store in Manhattan. Soon thereafter, Trader Joe’s made its
debut in the southeastern part of the United States. The stores remained fairly low-tech during this
time. The company did not even introduce price scanners at the checkout lines until 2001, and it
continues to eschew self-checkout to this day. In 2001 Shields stepped down as CEO; by that time, the
chain had grown to 175 locations. Dan Bane succeeded him as chief executive, and was still the
company’s leader as of 2013. Trader Joe’s remained a privately held company, owned by an Albrecht

family trust since Theo’s death in 2010.22

The Supermarket Industry

Wal-Mart, Kroger, Safeway, and Supervalu were the four largest grocers in the United States.23
(See Exhibit 1 for a list of the top grocers in the country.) Supermarkets traditionally operated on
very thin profit margins, and they faced increasing challenges in 2013. Many traditional supermarket
chains found themselves squeezed between premium players such as Whole Foods at the high end of
the market, and “hard discounters” such as Dollar General and Aldi at the low end.24 (See Exhibit 2
for details on the financial performance of several grocery retailers.)

Whole Foods Market ranked as the nation’s leading retailer of organic and natural foods. The
company operated more than 330 stores in the United States, Canada, and the United Kingdom.
Stores averaged roughly 38,000 square feet. Whole Foods locations typically carried 21,000 stock-
keeping units (SKUs). Two-thirds of its sales consisted of perishable items, including bakery and
prepared foods. That percentage ranked much higher than most supermarkets in the country. In 2012
Whole Foods achieved 8.4% same-store sales growth. Over the past decade, the company had

benefited from robust growth in natural and organic food sales in the United States.25

Meanwhile, Dollar General operated the largest number of small discount stores in the United
States, with over 10,000 locations in 40 states. Dollar General’s stores typically carried approximately
10,000 SKUs (mostly simple necessities such as laundry detergent, paper towels, socks, etc.) and had
7,200 square feet of selling space. The average customer completed a shopping trip in roughly 10
minutes. The company reported same-store sales growth of 4.7% in its 2012 annual report.26

Supermarkets had faced another major challenge in recent years. Their share of grocery sales in
the United States fell to 51% in 2011. Just a decade earlier, supermarkets had accounted for two-thirds
of all grocery sales in the nation. But supermarkets lost ground as large discount retailers (Wal-Mart,
Target), warehouse clubs (Costco, BJ’s, Sam’s Club), and pharmacy chains (CVS, Walgreen’s)
increased their emphasis on grocery sales.27

Wal-Mart had become the largest grocery retailer in the nation. The company operated over 3,000
supercenters throughout the U.S. These supercenters had an average of 185,000 square feet and
carried over 100,000 SKUs. Supercenters sold groceries as well as general merchandise, including
apparel, electronics, home goods, hardware, toys, and more. In 2012 Wal-Mart’s grocery revenues
exceeded $100 billion. Wal-Mart’s highly efficient operations enabled it to take share from traditional
supermarkets by dropping prices significantly.28 While Target did not operate nearly as many
supercenters as Wal-Mart, the company had recently expanded its food section dramatically at stores
throughout the country. By 2013, groceries accounted for nearly 20% of Target’s revenue. Like Wal-
Mart, Target found that grocery sales drove store traffic, leading to increased sales of higher-margin

items such as apparel and electronics.29

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As a result of these trends, many traditional supermarket chains found themselves shedding
employees in order to become more cost competitive. Several experienced financial distress. The
Great Atlantic and Pacific Tea Company (known as the A&P brand) had filed for bankruptcy
protection in December 2010. Supervalu, which operated chains such as Jewel and Albertson’s,
suspended its dividend in July 2012 and hired Goldman Sachs and Greenhill & Co. to examine

strategic options for the business.30 In January 2013, Supervalu sold five of its grocery chains to
private equity investors, cutting the size of the company roughly in half.

Trader Joe’s in 2013

By 2013, Trader Joe’s had expanded to approximately 400 locations across 37 states and the
District of Columbia. Of the 414 stores currently open or set to open in the coming year, 172 were
located in California (see Exhibit 3 for a list of stores by state). Illinois ranked second, with 20
locations. The top five states accounted for 60% of the company’s stores.31 Experts estimated that

Trader Joe’s generated approximately $10 billion in annual revenue.32 The company did not disclose
financial results, but most analysts believed that it achieved higher returns on investment than most
supermarkets in the nation. Experts noted that while Whole Foods Market had the highest sales per
square foot of any publicly traded grocer in the country, Trader Joe’s doubled the sales per square

foot achieved by Whole Foods (see Exhibit 1 for data on the top chains in the country).33

Store operations Many Trader Joe’s stores could be found in old strip malls in suburban

locations. The typical Trader Joe’s store had less than 15,000 square feet of selling space. Many early
locations maintained footprints of approximately 10,000 square feet. The typical supermarket ranged
in size from 40,000 to 50,000 square feet. As a result, Trader Joe’s did not have the wide aisles that
existed in many supermarkets. Writer Dave Gardetta explained the logic of the quirky, cramped
layout of the stores:

This “chevron” pattern is used in all Trader Joe’s stores, aisles canting left. . . . The offbeat
floor arrangement complements Trader Joe’s unregimented persona: “Hey, we just threw up
some shelves, and there they are.” It’s also a retail trick. Angled passageways reveal a store’s
contents in profile to arriving shoppers. Rows squared with the walls (see: any supermarket)
inadvertently conceal their contents from customers peering into a corridor’s mouth looking
for the toothbrush display.34

Checkout lines could be quite long at Trader Joe’s during busy Saturday mornings, and parking
lots tended to be quite crowded. One Los Angeles area blogger complained about it:

I love Trader Joe’s for their prices, for their Joe-Joe’s, for their simmering sauces. But, all the
mushy love I have for Trader Joe’s is nearly outweighed by how much I hate it for having
absolutely awful parking lots. If you don’t live near one of their new and improved stores—
i.e., the ones at Hollywood and Vine or Olympic and Barrington—then you’re stuck with an
archaic lot that is a one-way traffic jam from hell. This is my list of the 5 Worst Trader Joe’s
Parking Lots in LA.35

Trader Joe’s did not invest a great deal in technology within the stores. The company did not offer
self-checkout lanes, and it did not have flat-screen TVs at the checkout counter. CEO Dan Bane joked
about those televisions at rival retailers, noting that Trader Joe’s customers had the opportunity to

actually talk to employees.36

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Merchandising Trader Joe’s carried about 4,000 SKUs per location, as compared with as
many as 50,000 units for most grocery stores. Eighty percent or more of the products in a Trader Joe’s
store consisted of private label items. (Typical supermarkets generated less than 20% of their sales
through private label goods.) Because of this, customers could not find many of the major brands at
Trader Joe’s. If customers wanted Cheerios cereal or Coca-Cola beverages, they had to go elsewhere.
Nor did Trader Joe’s offer a wide selection of fresh meat or produce. Instead, it featured an extensive
frozen food collection. It also tended to sell fruit by the piece rather than by the pound. Beth Kowitt
of Fortune visited one of the company’s Manhattan stores and commented, “Make no mistake: A
typical family couldn’t do all its shopping at the store. There’s no baby food, toothpicks, or other

necessities. But for this crowd of urbanites and college kids, Trader Joe’s is nirvana.”37

Trader Joe’s buyers scoured the globe for interesting new products and tried not to follow trends.
Instead, they tried to identify new products that customers had not experienced previously. They also
avoided trade shows, which featured products that every other retailer could see. Because the
company stocked limited varieties of each product, its buyers purchased very large quantities of each
SKU at low prices. This enabled them to purchase goods directly from manufacturers, rather than
working through distributors or wholesalers. Trader Joe’s did not charge suppliers to slot their
products on the retailer’s shelves, unlike many rivals. Moreover, the company paid its suppliers
promptly, rather than trying to stretch out its accounts payable for as many days as possible.38

Trader Joe’s maintained a dynamic product mix that made shopping at the store feel like a
treasure hunt. Merchants strove to introduce 10–15 new products per week. As a result, they had to
eliminate 10–15 products each week. Some changes occurred because special seasonal items were
introduced or discontinued. In other cases, the buyers ruthlessly cut products that did not meet sales
goals. Employees became adept at consoling customers searching for discontinued products.39
Coulombe explained how he pursued a scarcity strategy quite deliberately:

I learned that lesson with vintage wines. There’s only so much 1966 Lafite Rothschild. So
we deliberately pursued a policy of discontinuity, as opposed to, say, Coca-Cola, which is in
infinite supply. For example, we had the only vintage-dated, field-specific canned corn in
existence, and it was the best damned canned corn there was. But there was only so much
produced every year, and when you’re out, you’re out.40

The company required its vendors to maintain complete secrecy about their relationship with the
retailer. Trader Joe’s did not want rivals or customers to know how and where it sourced its private
label goods. Suppliers often wanted complete secrecy as well, because they were providing Trader
Joe’s a much lower-cost version of their branded product, which might be selling at higher prices at
Whole Foods or other retailers. Occasionally reports did surface in the media about Trader Joe’s
vendor relationships, and reporters questioned how unique some Trader Joe’s products really were.
For instance, Fortune reported that Stonyfield Farm supplied Trader Joe’s yogurt on the East Coast,

and Pepsi’s snack division produced the retailer’s line of pita chips. 41

Customers Trader Joe’s claimed that 80% of its customers had attended college. The company

described its target market as “intelligent, educated, inquisitive individuals.”42 It focused on people
who were health conscious, enjoyed travel, and liked trying new things. Tony Hales, a store captain,
described the clientele: “Our favorite customers are out-of-work college professors. Well-read, well-
traveled, appreciates a good value.”43 Industry consultant Kevin Kelley described the target customer
as a “Volvo-driving professor who could be CEO of a Fortune 100 company if he could get over his
capitalist angst.”44 One article about the company described the customers as follows:

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These are people who wear sunscreen, even over their tattoos; who travel on frequent-flier
miles and with the Lonely Planet guide rather than a Frommer’s. People who play guitar and
pay their taxes. Who roller-blade or bike to work on the days they’re not driving the minivan.
Who dress their kids in tie-dye but have really good car seats. Such folks might have
unfortunate thoughts about their fellow Americans while waiting in the sun for a parking

space, but they would never, ever yell at them out the window.45

Trader Joe’s enjoyed a cult-like following. Many customers launched online efforts to persuade
Trader Joe’s to open a store in their region. They created Facebook fan pages, wrote cookbooks
featuring meals prepared with the firm’s products, and waited in line for hours before a new store
grand opening. Founder Coulombe joked, “My children say that the Albrechts own the business, but
I own the cult.”46 One customer, Cherie Twohy, explained her passion for the company:

I’ve always been a Trader Joe’s groupie. I grew up in Southern California, as did TJ’s. . . . As
I became more interested in food and cooking, I found myself cruising the aisles of different TJ
stores, as they expanded, first in California, and then across the country. When I got ready to
open my own cooking school, Chez Cherie, I decided to see how much interest there might be
in classes focused on cooking with Trader Joe’s products. They’ve been so popular and are a
ton of fun to teach. In 2009 I was contacted by a publisher interested in doing a Trader Joe’s
cookbook. Since I’d been doing the classes for years, it seemed like a natural next step. The first

book came out in November 2009 and so far has sold over 70,000 copies!47

Several years earlier, CEO Dan Bane wrote a letter to employees describing why he felt Trader
Joe’s customers had become so loyal to the company. He explained, “Our people are warm and
friendly. It’s fun and an adventure. They find unexpected products. They experience cheap thrills.
Our people are helpful and knowledgeable. They know that we have tested each product to ensure

quality and satisfaction. They trust us.”48

Marketing Trader Joe’s marketed primarily through its Fearless Flyer as well as occasional
radio ads, and never ran television ads. The company produced the flyer and wrote the radio spots
itself rather than hiring an advertising agency. Employees rather than professional actors starred in
the commercials. In addition, one or more employees in each store served as the resident artists who
produced quirky hand-written signage. Trader Joe’s specifically chose not to employ a public
relations agency. Bane explained, “They are a waste of money. If you give your customers great

products at great prices, why do you need one?”49 Many customers had learned about Trader Joe’s
through word of mouth.

Unlike many grocers, the company did not have a loyalty-card program. Trader Joe’s also did not

offer or accept coupons.50 The Fearless Flyer provided information about various products, but it did
not advertise weekly sales. If customers were not satisfied with a product that they purchased, they
could return it with no questions asked. The firm explained its pricing philosophy in the frequently
asked question section of its website.

[Q:] Do you have weekly specials or sales on your products? [A:] “Sale” is a four-letter
word to us. We have low prices, every day. No coupons, no membership cards, no discounts.
You won’t find any glitzy promotions or couponing wars at our stores. If it makes you feel any
better, think of it as all our items are on sale, day in and day out.51

If customers searched social media platforms for information about Trader Joe’s, they would not
find any official company Facebook pages or Twitter accounts. Trader Joe’s had not created any such
material. However, they would find a great deal of content generated by fans of the company.

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Hundreds of fan pages existed on Facebook: the “traderjoesfan” Facebook page had accumulated
over 550,000 “likes” as of July 2013.52 Customers also routinely created pages to try to persuade the
company to open a location in their towns. Such pages often attracted more than 5,000 followers in a
matter of weeks. One fan’s Twitter account—@traderjoeslist—described the “yummy, healthy Trader
Joe’s items” on her shopping list. She had more than 39,000 followers.53 Customers uploaded videos
to YouTube as well. More than 880,000 people had viewed one fan’s “If I Made a Trader Joe’s
Commercial” video.54

Some experts bemoaned the absence of a company-led social media strategy. Nicole Spector of
Direct Marketing News wrote, “But no matter how ‘awesome’ and ‘amazing’ Trader Joe’s influence
on its fan base is, marketing experts concur that not having an authoritative voice in social media is a
weakness.”55 She gave the company a zero in the social media category on her marketing scorecard.
Sarah Mayer and Jennifer Ashley of Infiniti Marketing Solutions commented, “We think they are
missing a great opportunity to spread the loyalty and the customer experience outside of their store.
Their customers are talking about them in Twitter, on Facebook and beyond, so why not get involved

in that conversation?”56

People Trader Joe’s continued to adhere to Coulombe’s strategy of paying staff more than they

might expect at rival grocers. New part-time hires typically earned $12 per hour. Full-time employees
earned approximately $50,000 per year. Store captains grossed more than $100,000 per year. Trader
Joe’s also contributed 15.4% of employees’ pay to retirement accounts. The company even offered
some health care benefits to part-time employees. According to Businessweek, the health care policy
made the store “a haven for artists, musicians, and other creative types who wouldn’t normally seek
supermarket jobs.”57

Trader Joe’s tended to receive many applicants for each job opening. When the company opened
its first store in Kansas City, it stopped taking applications after receiving 1,000 inquiries. The
company eventually hired 50 people from that applicant pool. When hiring, Trader Joe’s sought
extroverted individuals who could empathize with customers. Mark Gardiner, a former employee,
described the type of people with whom he had worked:

Trader Joe’s also extracts a ton of value from one of America’s least-utilized natural
resources: the pool of artsy, creative, college-educated young people who graduate without the
hard skills that would allow them to get technical jobs. As it turns out, kids who graduated
from their college theater program and (surprise!) couldn’t get a job acting; kids who got their
bachelor’s degree in history and then realized (oops!) there aren’t too many job openings for
historians . . . lots of those kids make great customer-service employees. . . . These kids
especially show their value in an environment where they’re empowered to do whatever it
takes to make sure customers are happy, and they’re given some creative leeway. Many of
them come to work at Trader Joe’s and feel really appreciated and (bonus!) that coming to
work is almost an extension of their social life, because they’re surrounded by people like
themselves.58

When new employees (“crewmembers” in Trader Joe’s lingo) came onboard, they received 10
days of training. Gardiner described the training he received before the grand opening of the firm’s
Kansas City store:

We had spent ten days of indoctrination before the Grand Opening. . . . I use the word
indoctrination to describe those first ten days, because the actual training was minimal.
Admittedly, most of the day-to-day work on the floor of a grocery store is menial. But I was
still struck by the ratio of time spent discussing values, compared to time spent discussing

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Trader Joe’s 714-419

9

process. . . . What we did do, for hours, was listen to the Hawaiian shirts talk about Trader
Joe’s company values and the ways Trader Joe’s was different from other stores.59

Trader Joe’s did not trumpet its mission statement during these training sessions, as some
companies did. However, it emphasized the organization’s seven core values: integrity; we are a
product-driven company; at Trader Joe’s we create WOW customer experience every day; no
bureaucracy; we are a national chain of neighborhood grocery stores; KAIZEN!; the store is our

brand.60

Trader Joe’s wanted its employees to become familiar with the company’s products and therefore
encouraged them to try various items throughout the store. Each store received an expense account
that provided the funds for employees to sample new foods. Further, employees received a 10%
discount on their purchases. Of course, the company also provided many sampling opportunities for
its customers. If one walked through a Trader Joe’s on a weekend, one might find a handful of
different sampling stations.

Trader Joe’s expected its employees to be generalists, not specialists. To that end, crewmembers
learned how to do every job in the store. And the company promoted from within whenever possible.
While employees did specialize at times (e.g., the resident artists who made the signage), they tended
to rotate roles not only from day to day, but hour by hour. In fact, managers typically did not allow
crewmembers to work at the checkout stations for more than two hours at a time. And each hour a
different crewmember played the role of “helmsman,” greeting customers as they entered the store.61

Another unique feature of Trader Joe’s was that it discouraged its managers from making
announcements to crewmembers over the intercom system. Instead, the company implemented a bell
system to communicate key messages. The firm’s website explained the Trader Joe’s version of Morse
code: “One bell lets our Crew know when to open another register. Two bells mean there are
additional questions that need to be answered at the checkout. Three bells call over a manager-type

person.”62

Although many retailers restocked their shelves almost completely at night, when no customers
roamed the aisles, Trader Joe’s did not adhere to that common industry practice. One could find
crewmembers replenishing shelves even during peak shopping periods. However, managers stressed
that helping customers should always take priority over stocking shelves. If customers needed help
finding an item, crewmembers walked with them to the product’s location rather than just directing
them to a particular aisle.

While restocking shelves, crewmembers sometimes realized that the store had run out of certain
items, and managers gave them latitude to make adjustments on those occasions. Gardiner explained

that “crewmembers are told to fill empty spots with products they do have.”63 In fact, product
displays shifted constantly so as to keep the shelves looking full. Gardiner commented, “That means
stocking shelves, which could seem like a mind-numbingly tedious job (and it is one) is also a task
that involves making a constant series of adjustments.”64 Store managers, too, did not have to adhere
strictly to a “planogram” developed by the corporate office. They could adapt how and where
products were displayed based on their understanding of the local clientele.

Some observers marveled at how happy the crewmembers always seemed. Writer Carmel Lobello
wrote, “So what’s the deal? Is there booze in the water cooler in the break room? Are they all having

sex? Or are they really just that jazzed about selling $2 jars of chicken satay peanut sauce?”65 She
interviewed a long-time employee who told her, “When you hire friendly ‘people-people’ and then
when you take good care of them with really good benefits and a really good hourly wage it’s a self-

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714-419 Trader Joe’s

10

fulfilling prophecy.” He also explained that crewmembers often chose to “hang out together after
work.”66

At times, crewmembers also marveled at how friendly customers often were with one another.
Gardiner described one interaction his wife had with another customer at his store: “My wife was
shopping in what we call the HABA aisle (. . . ‘health and beauty aids’) when a total stranger started a
long conversation about the oatmeal soap. That’s just not the kind of thing that happens in regular
grocery stores. Where do people comfortably initiate conversations with strangers?”67

Looking Ahead

In 2013 Trader Joe’s continued to expand across the nation, but more rapidly than in the past,
although still at a measured pace relative to most retailers. Based on surveys of employees, Forbes and
Glassdoor.com ranked Trader Joe’s on their 2013 list of the “Top 50 Companies to Work For” in the
U.S. Many experts continued to marvel at the firm’s success.68

A feature article in Fortune heaped glowing praise on the company, although it did offer a few
words of caution. Writer Beth Kowitt questioned whether the company might lose its “charm” and
“quirky cool” as it expanded. One former employee explained, “In the early days we never tried to be
the neighborhood store.”69 In other words, he believed the local-neighborhood feel of those early
southern California stores was more authentic. Kowitt cited other ex-crewmembers who worried
about growing bureaucracy at the company as it implemented new processes and procedures. Mark
Gardiner expressed some concern as well. He described how recent changes had led to increased
competition among employees seeking advancement.70

Despite those concerns, customers around the country continued to clamor for a new store near
them. Julie Merrill created a Facebook page to persuade Trader Joe’s to come to Utah, and she
attracted nearly 4,000 fans to her page. In June 2012, she heard the news that Trader Joe’s was coming

to her state. Merrill described her reaction to the local ABC affiliate: “I was psyched. . . oh my gosh!”71
Deb Sussman waited in line for hours on November 30, 2012, when the Salt Lake City store finally

opened. She told reporters, “I have written over 50 letters to get them to come here.”72 Many thought
that Merrill or Sussman would be the first customers to enter when the Salt Lake City location
opened its doors for the first time, but that was not the case. David Stinson walked in first when the
store’s captain, Rory Violette, cut a giant lei at the entrance and welcomed customers into the store at
8:00 a.m. Stinson had camped out overnight to be first in line, having arrived at 4:00 p.m the previous

afternoon.73

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Trader Joe’s 714-419

11

Exhibit 1 Top 12 Supermarkets in the United States (ranked by revenue)

Rank Companya
Grocery Salesb

(billions)
Square Feet of

Selling Area (millions)

1 Wal-Mart $118.7 195.5

2 Kroger 61.1 104.0

3 Safeway 35.5 53.6

4 Supervalu 28.2 48.9

5 Ahold USA 26.2 31.9

6 Publix 22.8 38.6

7 Delhaize America 18.6 45.4

8 H-E-B Grocery 13.0 15.0

9 Lone Star (Winn-Dixie) 10.4 24.6

10 Meijer 9.2 12.5

11 Whole Foods 8.8 7.0

12 Trader Joe’s 7.6 3.7

Source: Progressive Grocer, “The Super 50,” May 2012, http://www.progressivegrocer.com/inprint/article/id2735/
artimages/PG/PG052012_table38.pdf, accessed September 2013.

a The list excluded warehouse clubs such as Costco, BJ’s, and Sam’s Club.

b The sales data included grocery merchandise only. The author (Progressive Grocer) omitted sales for other
merchandise sold in these stores, including apparel, electronics, appliances, etc. Therefore, the sales figures here did
not match published revenue reports by these companies.

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714-419 Trader Joe’s

12

Exhibit 2 Comparative 2011 Financial Performance of Selected Retailers (in $000s)

Source: Annual Reports of each firm.

Whole Foods Kroger Safeway Supervalu

Revenue $ 10,107,787 $ 90,374,000 $ 43,630,200 $ 36,100,000

Cost of Goods Sold $ 6,571,238 $ 71,494,000 $ 31,836,500 $ 28,081,000

Gross Profit $ 3,536,549 $ 18,880,000 $ 11,793,700 $ 8,019,000

SG&A and Other Expenses $ 2,988,929 $ 17,602,000 $ 10,659,100 $ 8,538,000

Operating Income $ 547,620 $ 1,278,000 $ 1,134,600 $ (519,000)

Net Income $ 342,612 $ 602,000 $ 516,700 $ (1,040,000)

Total Assets $ 4,292,075 $ 23,476,000 $ 15,073,600 $ 12,053,000

Total Liabilities $ 1,300,770 $ 19,510,000 $ 11,384,500 $ 12,032,000

Total Equity $ 2,991,305 $ 3,966,000 $ 3,689,100 $ 21,000

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Trader Joe’s 714-419

13

Exhibit 3 Trader Joe’s Store Locations (as of July 2013): Existing Stores and
Future Openings Announced by the Company

Source: Adapted from “Where in the Dickens Can You Find a Trader Joe’s,” http://www.trader
joes.com/pdf/locations/all-llocations.pdf, accessed July 22, 2013.

State # of Stores State # of Stores

California 172 Missouri 5

Illinois 20 Florida 4

New York 19 Kentucky 3

Washington 19 New Mexico 3

Massachusetts 18 South Carolina 3

Arizona 14 Wisconsin 3

Virginia 13 Colorado 2

Oregon 12 Indiana 2

New Jersey 11 Nebraska 2

Texas 11 New Hampshire 2

Pennsylvania 9 Tennesee 2

North Carolina 9 Delaware 1

Maryland 8 District of Columbia 1

Minnesota 8 Iowa 1

Georgia 7 Kansas 1

Connecticut 7 Maine 1

Michigan 6 Rhode Island 1

Nevada 6 Utah 1

Ohio 6 Louisiana 1

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Dec 2022.

714-419 Trader Joe’s

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Endnotes

1 Brad Tuttle, “How Two German-Owned Sister Supermarket Brands Became Hot Trendsetters in the U.S.,“
Time, July 29, 2013, http://business.time.com/2013/07/29/how-two-german-owned-sister-supermarket-brands-
became-hot-trendsetters-in-the-u-s/, accessed July 2012.

2 “Wegmans, Trader Joe’s, Publix Top Consumer Reports Supermarket Survey: New tips to save big and
avoid costly in-store mistakes,” Consumer Affairs, April 6, 2009, http://www.consumeraffairs.com/news04/
2009/04/cr_supers.html, accessed July 20, 2012.

3 “Most Innovative Companies 2011,” Fast Company, http://www.fastcompany.com/most-innovative-
companies/2011/, accessed July 20, 2012.

4 Thad Moore, “Trader Joe’s draw traffic, hubbub over weekend,” The Daily Gamecock, March 25, 2013,
http://www.dailygamecock.com/article/2013/03/trader-joes-draws-traffic-hubbub-over-weekend, accessed
July 23, 2013.

5 Beverly Fortune, “Lexington celebrates grand opening of Trader Joe’s,” Lexington Herald-Leader, June 29,
2012, http://www.kentucky.com/2012/06/29/2242518/trader-joes-in-lexington-opens.htm, accessed July 20,
2012.

6 Danika Kirka, “Tesco will pull out of US, sell Fresh & Easy,” USA Today, April 17, 2013, http://www.usa
today.com/story/money/business/2013/04/17/tesco-exits-usa/2090801/, accessed July 22, 2013.

7 Anne D’Innocenzio, “Wal-Mart Sees Early Success in Wal-Mart Express,” Businessweek, May 23, 2012,
http://www.businessweek.com/ap/2012-05/D9UUNAU80.htm, accessed July 20, 2012.

8 Karen Talley, “Walmart says its smaller stores make inroads,” Wall Street Journal, March 5, 2013,
http://online.wsj.com/article/SB10001424127887323494504578342421549936916.html, accessed July 22, 2013.

9 Sarah Perez, “Amazon Bets On Web Groceries, Expands AmazonFresh To L.A.,” TechCrunch, June 10, 2013,
http://techcrunch.com/2013/06/10/amazon-bets-on-web-groceries-expands-amazonfresh-to-l-a/, accessed July
25, 2013.

10 Patt Morrison, “Everybody’s got a Trader Joe’s story, and the original one belongs to the original Joe,
Joe Coulombe,” Los Angeles Times, May 7, 2011, http://articles.latimes.com/2011/may/07/opinion/la-oe-
morrison-joe-coulombe-043011, accessed July 16, 2012.

11 Trader Joe’s, “Timeline,” http://www.traderjoes.com/about/timeline.asp, accessed July 16, 2012.

12 Morrison, “Everybody’s got a Trader Joe’s story.”

13 Morrison, “Everybody’s got a Trader Joe’s story.”

14 Morrison, “Everybody’s got a Trader Joe’s story.”

15 ALDI, “Company Overview,” http://aldi.us/us/html/company/17536_ENU_HTML.htm?WT.z_src=
main, accessed July 23, 2013.

16 Walter Loeb, “Aldi’s Trader Joe’s is a Winner,” Forbes. May 17, 2012, http://www.forbes.com/
sites/walterloeb/2012/05/17/aldis-trader-joes-is-a-winner/, accessed July 17, 2012.

17 Juergen Baetz, “Theo Albrecht, one of Germany’s richest men, dies,” USA Today, July 28, 2010,
http://www.usatoday.com/money/world/2010-07-28-theo-albrecht_N.htm, accessed July 20, 2012.

18 Trader Joe’s, “Timeline.”

19 Trader Joe’s, “Timeline.”

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Trader Joe’s 714-419

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20 Denis M. McSweeney, Walter J. Marshall, “The Prominence of Colleges and Universities in the Boston
Metropolitan Area,” Regional Report, U.S. Bureau of Labor Statistics, (Summary 09-01, February 2009),
http://www.bls.gov/opub/regional_reports/200902_colleges_boston.pdf , accessed December 2013.

21 Trader Joe’s, “Timeline.”

22 Trader Joe’s, “Timeline.”

23 Meg Major, Debra Chanil, and Nielsen TDLinx, “The Super 50 – Introduction / Methodology,” Progressive
Grocer, May 2012, http://www.progressivegrocer.com/inprint/article/id2735/the-super-50introduction-
methodology/, accessed July 18, 2012.

24 Annie Gasparro and Timothy Martin, “What’s Wrong with America’s Supermarkets?” Wall Street Journal,
July 12, 2012, http://online.wsj.com/article/SB1000142405270230437380457752291224486 6078.html, accessed
July 23, 2012.

25 Whole Foods 2012 Annual Report.

26 Dollar General 2012 Annual Report.

27 Gasparro and Martin, “What’s Wrong with America’s Supermarkets?”

28 Wal-Mart 2012 Annual Report.

29 Gasparro and Martin, “What’s Wrong with America’s Supermarkets?”

30 Gasparro and Martin, “What’s Wrong with America’s Supermarkets?”

31 Trader Joe’s, “Find a Trader Joe’s,” http://www.traderjoes.com/stores/index.asp, accessed July 16, 2012.

32 PG Staff Editors and Debra Chanil, “The Super 50,” Progressive Grocer, May 5, 2013, http://www.
progressivegrocer.com/inprint/article/id5809/the-super-50/, accessed July 23, 2013.

33 Beth Kowitt, “Inside the Secret World of Trader Joe’s,” Fortune, August 23, 2010, http://money.cnn.com/
2010/08/20/news/companies/inside_trader_joes_full_version.fortune/index.htm, accessed July 16, 2012.

34 Dave Gardetta, “Enchanted Aisles,” Los Angeles Magazine. September 1, 2011, http://www.lamag.com/
features/Story.aspx?id=1515075, accessed July 20, 2012.

35 Queequeg, “The 5 Worst Trader Joe’s parking Lots in LA,” Blogging Los Angeles (blog), August 9, 2010
(9:19am), http://blogging.la/2010/08/19/the-5-worst-trader-joe%E2%80%99s-parking-lots-in-la/, accessed July
21, 2012.

36 Christopher Palmeri, “Trader Joe’s Recipe for Success,” Businessweek, February 20, 2008, http://www.
businessweek.com/stories/2008-02-20/trader-joes-recipe-for-success, accessed July 23, 2012.

37 Kowitt, “Inside the Secret World of Trader Joe’s.”

38 Mark Gardiner, Build a Brand Like Trader Joe’s (Seattle: Amazon Digital Services, 2012).

39 Gardiner, Build a Brand Like Trader Joe’s.

40 Morrison, “Everybody’s got a Trader Joe’s story.”

41 Kowitt, “Inside the Secret World of Trader Joe’s.”

42 Gardiner, Build a Brand Like Trader Joe’s.

43 Associated Press, “Trader Joe’s Targets ‘Educated’ Buyer,” Seattle Post-Intelligencer, August 29, 2003.

44 Kowitt, “Inside the Secret World of Trader Joe’s.”

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714-419 Trader Joe’s

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45 Mary McNamara, “In the aisles of Trader Joe’s, a culture all its own,” Los Angeles Times, July 8, 2003,
http://articles.latimes.com/2003/jul/08/entertainment/et-mcnamara8, accessed July 23, 2012.

46 Beth Kowitt, “Meet the original Joe,” Fortune, August 23, 2010, http://features.blogs.fortune.cnn.com/
2010/08/23/meet-the-original-joe/, accessed July 17, 2012.

47 Cherie Twohy, “Guest Author: Cheri Twohy and the I Love Trader Joe’s Cookbook,” June 15, 2011, post on
blog “Living Vicuriously: The Zen of Unsure Things,” http://pasadenadailyphoto.blogspot.com/2011/06/
guest-author-cherie-twohy-and-i-love.html, accessed July 23, 2012.

48 Gardiner, Build a Brand Like Trader Joe’s.

49 Gardiner, Build a Brand Like Trader Joe’s.

50 Palmeri, “Trader Joe’s Recipe for Success.”

51 Trader Joe’s, “Trader Joe’s FAQs,” http://www.traderjoes.com/about/faq.asp, accessed July 23, 2013.

52 Trader Joe’s Fan, “Trader Joe’s Fan is on Facebook. To connect with Trader Joes Fan, . . .” Facebook online
fan community for Trader Joe’s stores and corporation, http://www.facebook.com/pages/Trader-Joes-
Fan/15934023652, accessed July 23, 2013.

53 Trader Joe’s List, “Trader Joe’s items plus more listed daily. Fan Based!” Twitter Account devoted to
Trader Joe’s, https://twitter.com/traderjoeslist, accessed July 23, 2013.

54 Carlsfinefilms, “If I Made a Commercial for Trader Joe’s,” YouTube, January 27, 2009, http://www.you
tube.com/watch?v=OdB7GDZY3Pk, accessed July 23, 2013.

55 Nicole Spector, “Giant specialty supermarket chains attract similar consumers on different marketing
levels,” Direct Marketing News, July 1, 2012, http://www.dmnews.com/giant-specialty-supermarket-chains-
attract-similar-consumers-on-different-marketing-levels/article/247400/, accessed July 24, 2012.

56 Sarah Mayer and Jennifer Ashley, “Trader Joe’s Lacks a Social Media Presence, Really!” Infiniti Marketing
Solutions, http://www.infinitimarketingsolutions.com/trader-joes-lacks-a-social-media-presence-really/, accessed
July 24, 2012.

57 Palmeri, “Trader Joe’s Recipe for Success.”

58 Gardiner, Build a Brand Like Trader Joe’s.

59 Gardiner, Build a Brand Like Trader Joe’s.

60 Gardiner, Build a Brand Like Trader Joe’s.

61 Gardiner, Build a Brand Like Trader Joe’s.

62 Trader Joe’s, “Trader Joe’s FAQs,” http://www.traderjoes.com/about/general-faq.asp, accessed July 24,
2012.

63 Gardiner, Build a Brand Like Trader Joe’s.

64 Gardiner, Build a Brand Like Trader Joe’s.

65 Carmel Lobello, “Why is everyone at Trader Joe’s so happy?” deathandtaxes, February 9, 2012,
http://www.deathandtaxesmag.com/178372/why-is-everyone-at-trader-joes-so-happy/, accessed July 20, 2012.

66 Lobello, “Why is everyone at Trader Joe’s so happy?”

67 Gardiner, Build a Brand Like Trader Joe’s.

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Dec 2022.

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68 Jacquelyn Smith, “The Best Companies to Work For in 2013,” Forbes, December 12, 2012. http://www.
forbes.com/sites/jacquelynsmith/2012/12/12/the-best-companies-to-work-for-in-2013/, accessed July 22, 2013.

69 Kowitt, “Inside the Secret World of Trader Joe’s.”

70 Kowitt, “Inside the Secret World of Trader Joe’s.”

71 Chris Vancour, “The woman behind Utah’s Trader Joe’s Facebook page,” ABC4 News UTAH.com, June 6,
2012, http://www.abc4.com/content/news/top_stories/story/The-woman-behind-Utahs-Trader-Joes-Facebook-
page/gDyOd99jvU66qJcSF71syQ.cspx?rss=20, accessed July 21, 2012.

72 Emily Clark, “Trader Joe’s opens doors in Salt Lake City,” ABC4 News UTAH.com, November 30, 2012,
http://www.abc4.com/content/news/top_stories/story/Trader-Joes-opens-doors-in-Salt-Lake-City/d8Uf8thq
uUGMJ71qlYT3_w.cspx , accessed July 23, 2013.

73 Haley Bissegger, “Sale Lake Trader Joe’s opens doors to Utah,” The Digital Universe, December 3, 2012,
http://universe.byu.edu/2012/12/03/salt-lake-trader-joes-opens-doors-to-utah/, accessed July 23, 2013.

For the exclusive use of J. Barajas, 2022.

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Dec 2022.

Olivia Lee, PhD
CSU Fullerton
College of Business and Economics

Week 4

▪ Types of external environments
– General environment
– Competitive environment (Industry)

▪ Analysis tools
– 5 forces model

MGMT 449 | Lee

Chap 2.

2

▪ The general environment is composed of factors that
can have dramatic effects on firm strategy. But, these
factors are both hard to predict and difficult to control:

▪ Demographic: Aging population, rising affluence, ethnic composition,

geographic distribution, income,….

▪ Sociocultural: More women in the workplace, increase in temporary workers,

greater concern for fitness or environment, …

▪ Political/Legal: Law, taxation, regulation, patents,….

▪ Technological: Development in technology, innovation…(internet, CAD, nano-

tech, AI..)

▪ Economic: Interest rates, unemployment rates, consumer price index, GDP,..

▪ Global : exchange rates, emergence of the Indian and Chinese economies, trade

agreements among regional blocs, WTO, risk of terrorism or wars

MGMT 449 | Lee 3

▪ The impact of all segments of the general
environment varies across industries.

MGMT 449 | Lee

•Influence on Health
Care?

•Impact on Baby
products?

Positive

Negative

4

MGMT 449 | Lee

Census Bureau (2018)

•Positive impact of high income: healthy foods, upscale pets and supplies, …
•Negative impact of high income: fast foods, …

5

MGMT 449 | Lee 6

Source: Fortune.com

MGMT 449 | Lee 7

Source: statistica.com

Minor (1)
to severe
(5) in 2020

▪ Factors that pertain to an industry and affect a firm’s
strategies

▪ Understanding industry structure
: Porter’s 5 forces model

MGMT 449 | Lee 8

Textbook (Ch.2)

+ M. Porter’s HBS article
“ Understanding industry structure”

▪ Metals & Mining

▪ Semiconductor

▪ Drugs (Pharmaceutical)

▪ Tobacco

▪ Software (Entertainment)

MGMT 449 | Lee 9

1. Tobacco: 37.06%
2. Transportation (Railroads): 36.64%
3. Real Estate: 31.60%
4. Utility(Water): 27.09%
5. Software (Entertainment): 26.66%
6. Semiconductor: 26.59%
7. R.E.I.T. (Real estate investment trusts): 25.11%
8. Information Services: 2.08
9. Metals & Mining: 22.98%
10. Drugs (Pharmaceutical): 22.78%

MGMT 449 | Lee

Source: Forbes (2019)

10

A tool for understanding industry profitability.

▪ Not necessarily company profitability.

MGMT 449 | Lee

Supplier
Bargaining Power

The Intensity
of Rivalry

11

▪ New entrants typically erode incumbent market
share.

▪ The extent of the threat depends on 1) existing
barriers to entry and 2) the combined reactions from
existing competitors

MGMT 449 | Lee 12

MGMT 449 | Lee

Threat of New Entrants is High When High Low

1.Economies of scale are
▪Why? High EoS: high costs (a large scale) or cost disadvantage (a
small scale)

X

2.Product differentiation is
▪Why? No strong brand, low customer loyalties of existing firms
→Willing to try new entrants’ products/services

X

3.Capital requirements are
▪Why? Low sunk costs like advertising or R&D
→ Low up-front costs

X

4.Switching costs are
▪Why? One-time costs that the buyer faces when switching
→Not difficult to try new entrants’ products/services

X

5.Incumbent’s control of distribution channel is
▪Why? Available sales channel

X

13

Output (Q)

AC

economies

of scale

diseconomies

of scale

constant returns

to scale

AC (Q)

MGMT 449 | Lee 14

MGMT 449 | Lee

Threat of New Entrants is High When High Low

6.Cost disadvantages independent of scale X

1) Incumbent’s proprietary knowledge is
▪Why? Not protected knowledge by law

X

2) Incumbent’s access to raw material is
▪Why? Available raw materials

X

3) Incumbent’s access to government subsidies is
▪Why? No favorable government policies

X

15

MGMT 449 | Lee 16

MGMT 449 | Lee

▪ The industry threat coming from existing
competitors

▪ Often the most visible competitive force (price
reductions, advertising battles, new product
introductions, additional services, etc.).

17

MGMT 449 | Lee

Intensity of Competitive Rivalry is High When: High Low

1.Number of competitors is
▪Why? Fierce competition

X

2. Balance of competitors in size is
▪Why? No dominant industry leader. Fierce competition

X

2. Industry growth rate is
▪Why? A fight for market share

X

3.Fixed or storage costs are
▪Why? Pressure to increase market share

X

4. Product differentiation is
▪Why? Homogeneous products are perfect substitutes. Price
competition

X

5. Switching costs are
▪Why? Easy to try rivals’ products/services

X

6. Exit barriers are
▪Why? Firms tolerate low profitability

X

18

MGMT 449 | Lee 19

Substitutes almost always exist and are similar to new entrants,
but the threat is from a different product, not a different
producer.

Industry profits threatened most if…

▪ Another product or service fulfills the same need and offers a
better price-for-performance trade-off (at similar usage levels).

1. Similar performance, lower price.

2. Similar price, greater performance.

MGMT 449 | Lee

Vs.

Chap 2.

20

▪ Substitute or complement?

▪ Substitutes → increase in the price of A increases demand for B.

(ex. Parking permit vs. bus passes, Coffee vs. Juice)

▪ Complements→ increase in the price of A decreases demand for B.

(ex. Gas vs. parking permits, Hamburger vs. Ketchup)

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Chap 2.

21

Powerful buyers typically demand lower prices but sometimes
higher quality and/or greater service, too. They also play
competitors against each other.

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▪Price-cut
▪ high quality
product/service

Chap 2.

22

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Power of Buyers is High When: High Low

1. Concentration of buyers relative to suppliers is
▪Why? The importance of the buyers to the suppliers, Volume
discounts

X

2.Switching costs are
▪Why? Price determines product choice

X

3.Product differentiation of suppliers is
▪Why? Homogeneous products →Substitutes compete on price.

X

4. Threat of backward integration by buyers is
▪Why? Eliminate supply chain link

X

5. Extent of buyer’s profits is
▪Why? More sensitive to price

X

6. Importance of the supplier’s input to quality of buyer’s final
product is
▪Why? More sensitive to price

X

Chap 2.

23

Powerful suppliers typically charge higher prices but sometimes
offer lower quality and/or lesser service, too.

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▪Price increase
▪ Reduced quality of
product/service

Chap 2.

24

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Power of Suppliers is High When: High Low

1. Concentration of suppliers relative to buyers is
▪Why? Influences prices, quality, and terms.

X

2.Switching costs of the buyers are
▪Why? Reduces options for buyers, insensitive to price fluctuations

X

3.Product differentiation of suppliers’ products/services is
▪Why? Few substitute for inputs.

X

4. Threat of forward integration by suppliers is
▪Why? Direct competition

X

5. Availability of substitute product is
▪Why? Limits options for the buyers

X

6. Importance of customer to the supplier is
▪Why? Limits negotiating leverage of the buyers

X

Chap 2.

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Suppliers Buyers

Chap 2.

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Supplier
Bargaining Power

The Intensity
of Rivalry

27

The threats of 5 forces
squeeze the

profitability of an
industry

Pros
▪ Identify industry-level determinants of profitability
▪ Framework for analyzing effects of industry developments
▪ Using a “checklist” helps avoid careless oversights

Cons
▪ Does not account for company-level variance in profitability
▪ Assumes a zero-sum game, and overlook potentials for win-win

relationships
▪ A static, not a dynamic, analysis: Difficult to analyze effects of changes

within a specific company
▪ What about general environmental changes?

▪ Likely influence dimensions of rivalry, entry barriers, buyer power, supplier power or
substitutes.

Analysis provides raw material for strategy formulation.

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Chap 2.

28

 SWOT (Chapter 2)

 Chapter 3: Internal environments of a firm
Internal analysis
(relative to 
competitors)

External analysis
(General & 
competitive)

S
Strengths

W
weaknesses

O
Opportunities

T
Threats

Build on a firm’s strengths
Remedy the weaknesses or work around them
Take advantage of the opportunities presented by the environment
Protect the firm from the threats

1. A static assessment
2. Strengths may not lead to an advantage.

If so, what are competitive advantages?
How can firms create them?

S
Strengths

W
weaknesses

O
Opportunities

T
Threats

?

Resource‐based view: Competitive Advantages
‐Resources and capabilities *
‐ (Sustainable) competitive advantages **
‐Value creation framework **

Value‐chain analysis * * Supplier Power Rivalry

What about specific companies?

 Beyond SWOT analysis

 Internal analysis of a company + external analysis 
of its competitive environment

 Competitive advantage cannot be determined 
without considering the broader competitive 
context. 

 Relative to competitors: Why some firms 
perform better than others?

Where do competitive advantages come from?  

 Firms’ resources and capabilities have potential for 
competitive advantages. 

 Sustainable CAs: Valuable, rare, and costly to imitate 
and substitute

Resources Capabilities

Assets that are relatively easy to identify 

 Physical assets
Ex) Plant & facilities, location, machinery & equipment

 Financial assets
Ex) Cash & cash equivalents, borrowing capacity, capacity to raise equity

 Technological resources
Ex) Trade secrets, patents, copyrights, trademarks, production processes

 Organizational resources
Ex)Effective planning processes & 

evaluation and control systems

 51,000 patents & pending (2013)
 Google’s parent company (Alphabet): 

$115 billion net cash(2018)

Assets that are more difficult for competitors to 
account for or imitate – are embedded in unique 
routines & practices
 Human resources 
Ex) Trust, experience & capabilities of employees; managerial skills & 

effectiveness of work teams

 Innovation resources 
Ex) Technical & scientific expertise & ideas; innovation capabilities

 Reputation resources 
Ex) Brand names, reputation for fairness with suppliers; reliability & 

product quality with customers 

 Google is the No. 1 place to work for the 8 
times in 11 years

Resources 
tangible or intangible assets

 Location
 Human capital
 Patents
 Experience
 Technology/equipment
 Reputation
 Working capital
 Loyal customers

Capabilities

ability to utilize assets profitably

 Sales & marketing
 HR management
 Legal acumen
 Culture
 New product design
 Financial engineering
 Brand management
 Forecasting

1. Is the resource or capability valuable?
‐ Does it improve a firm’s efficiency or effectiveness?
‐ Does it enable a firm to exploit opportunities or neutralize threats?

2. Is the resource or capability rare?
‐ It must be uncommon in other competitors. 

3. Is the resource or capability difficult to imitate?
‐ Inimitability constrains competition.  
‐ Ex) Groupon vs. LivingSocial

4. Are substitutes readily available?
‐ There must be no strategically equivalent valuable resources that are not are 

or inimitable. 
‐ Substitutes can be similar resources or very different resources.  

1.Is the resource or capability 
valuable?

‐ Does it improve a firm’s performance (in efficiency, 
effectiveness, revenues, costs, or combination of the two)?

‐ Does it enable a firm to exploit opportunities or neutralize 
threats?

 What is “Value Creation?”

Consumer 
Surplus

Profit
(Producer 
surplus)

Cost

Cost

Price

Willingness to Pay

Economic 
Surplus

(Total Value 
Created)Accounting & 

economic 
measures of 
value creation

(Total Perceived 
customer benefits)

Consumer 
Surplus

Profit

Cost

Total Cost

Sales Price

Willingness to Pay 
(Total Perceived 

customer benefits)

Economic 
Surplus

(Total Value 
Created )

1. Create more value*

• Increase consumer’s willingness 
to pay … without increasing cost.

• Decrease product cost … without 
decreasing WTP.

2. Claim more value *

• Increase sales price … holding 
cost and WTP constant.

* relative to competitors.

Where and how is 
value created?

 Let’s look at a sequential 
process of value‐creating 

activities in a company and 
identify valuable resources and 

capabilities

Cost

Profit
(price‐cost)

Economic 
Surplus

(Total Value 
Created)

Willingness to pay

Price

CustomersSuppliers

Purchasing, inventory 
holding, material 
handling
(material handling, warehousing, 
inventory control..)

Ex. JIT inventory 
system, locating 
near suppliers 
,efficient layout for  
raw materials

Production: 
Inputs Output
(machining, packaging, 
assembly..)

Ex. Efficient plant 
operations and 
layout, green 
manufacturing

Warehousing and 
distribution 

Ex. Effective 
shipping process, 
shipping in large 
volume, low 
transportation costs

All activities for 
purchases by 
buyers
(Ads, promotion, 
channel selection..)

Ex. Creative 
marketing, proper 
customer targets

After sales: 
Dealer 
support and 
customer 
service

Ex. Quick 
response to 
customer 
requests

Ex) speed, low cost, supplier relationships

Ex) Effective R&D, collaboration bw R&D and 
other departments

Ex) Effective recruiting, development, 
retention, reward system

Ex) Infrastructure activities: Effective planning 
systems, finance, MIS, legal services, good 
relationships with diverse stakeholders, strong 
leadership 

2. Is the resource or capability rare?

‐ It must be uncommon in other competitors. 
‐ If no, perfect competition dynamics are likely. 

No Competitive advantage, No above normal profits. 

3. Is the resource or capability 
difficult to imitate?

‐ It must be costly to imitate.
‐ Inimitability constrains competition.  

Ex) Groupon vs. LivingSocial
(Yipit, Coupon X, Woot, CoolSavings….)

1. Physical uniqueness: inherently difficult to copy

2.  Path dependency: resources built up over time  difficult to 
copy quickly and easily

1886~ 1965~ 1939~ 1909~

3. Casual ambiguity: difficult to explain what caused it to exist or 
how to re‐create it (A B? or C  B?)

4. Social complexity: costly to imitate because social 
engineering required is beyond the capability of competitors

Ex. Interpersonal relations among managers, organizational culture, reputation 
with suppliers & customers

IKEA system

Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications

1

Business‐level strategy: A strategy designed for a 
firm or a division of a firm that competes within a 
single business

How can a firm overcome the 5 forces and achieve 
competitive advantages to outperform rivals in their 

industry?

Chapter 5

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3

Differentiation or Cost Leadership strategies can enhance value creation!
Sustainable advantage of either strategy depends on 

rarity and costs of imitation.
MGMT 449  |    J. Lee

Competitive 
advantages

Resources

Capabilities

Consumer 
Surplus

Profit

Total 
Costs

Cost

Price

W.T.P.

4

Generic Strategies: 2 basic strategies for gaining competitive advantage 
(M. Porter, 1985)

MGMT 449  |    J. Lee

5

Generic Strategies: 2 basic strategies for gaining competitive advantage 
(M. Porter, 1985)

1. Cost Leadership
• Offer similarly‐

beneficial products or 
services (competitive 
parity) at lower cost

• e.g., Wal*Mart, Timex, 
Dell, IKEA, Ivory soap

MGMT 449  |    J. Lee 6

Resources

Capabilities

Consumer 
Surplus

Profit

Total Cost 
per Unit

Cost

Price

WTP

Cost Leadership strategies enhance economic surplus/ value.

MGMT 449  |    J. Lee

*Similarly beneficial 
products/service 
(competitive parity)

MGMT 449  |    J. Lee 7

Rare and inimitable resources and/or capabilities can enable a 
sustainable cost advantage over competitors.

1. Economies of scale
 Intel’s manufacturing economies of scale

2. Learning economies
 Honda’s experience‐based cost advantages

3. Differential access to, or costs of, inputs
 Silicon Valley in CA, Route 128 in MA, Research Triangle in NC

4. Technological advantages
 Wal‐Mart’s PoS, E*TRADE’s trading platform

5. Product design expertise
 IKEA’s user‐friendly platforms

8

Output (Q)

AC

economies
of scale

diseconomies
of scale

constant returns
to scale

AC (Q)

MGMT 449  |    J. Lee

9

Cumulative
Output

AC

AC1 (Q)

AC2 (Q)

MGMT 449  |    J. Lee 10

Rivalry

Threat of Entry

Supplier Power

Threat of Substitutes

Buyer Power
Cost leaders can flexibly 
absorb supplier cost 
increases, have strong 
bargaining power over 
suppliers and/ also deter 
forward integration.

Cost‐based barriers: Cost leaders discourage entry by raising start‐up 
costs and/or reducing profit expectations of new entrants.

Cost leaders can flexibly 
absorb costs of higher 
quality or service, have 
strong bargaining power 
over buyers, and/or also 
deter backward 
integration

Cost leaders can flexibly adjust prices to maintain 
favorable price‐performance comparisons with 
substitutes.

Cost leaders can usually prevail in 
price wars 

(Same price, diff profit/ or low price).

MGMT 449  |    J. Lee

 Too much focus on one or a few value chain activities.

 Increase in the cost of the inputs on which the advantage is 
based

 The strategy is imitated too easily

 A lack of parity on differentiation (sacrificing WTP?)

 Reduced flexibility due to heavy investments in 
economically scaled operations 
ex. plant and equipment, distribution systems

 Obsolescence of the basis of a cost advantage 
ex. In 1970s, US car makers vs. Japanese car makers in the US

MGMT 449  |    J. Lee 11 12

Generic Strategies: 2 basic strategies for gaining competitive advantage 
(M. Porter, 1985)

2. Differentiation
Offer products or services with 

similar costs (competitive 
parity) but greater perceived 
benefits (WTP)

Ex) Coke or Pepsi, Häagen Dazs

Focused 
Differentiation

Focused
Cost leadership

MGMT 449  |    J. Lee

13

Differentiation strategies can enhance value creation!

MGMT 449  |    J. Lee

Competitive 
advantages

Resources

Capabilities

Consumer 
Surplus

Profit

Total 
Costs

Cost

Price

W.T.P.

*Similarly costs 
(competitive parity)

14

1. Product features
 Gillette Mach3 or  Fusion ProGlide razor vs. Schick Quattro; complexity 

(manual vs. battery)
 Is shave quality a positive function of # of blades or motorization?

MGMT 449  |    J. Lee

15

2. Location
 Wine bottles prominently display the grapes’ origin on the label; critics rate most wines
 Why do consumers pay more for a wine from  France than other countries? Also, why 

Napa Valley than a similarly‐rated wine from California’s other areas?

French Wines

Napa Valley Wines

Madera Wines

MGMT 449  |    J. Lee
16

3. Timing
 Boudins: “Original San Francisco Sourdough French Bread” (established in 1849)

Fisherman’s Warf @ SF

MGMT 449  |    J. Lee

17

4. Customization

5. Consumer Marketing

6. Reputation

• Red Wing shoes customized for heavy‐industry workers (e.g., oil rigs)
• If shoes are designed precisely for your work, how likely are you to try substitutes?

• Coca‐Cola and Pepsi emphasis on direct marketing
• Why do people pay more for a Coke than a Kroger cola?

• Apple, Johnson & Johnson, Procter & Gamble, etc. are frequently on the Forbes most‐
admired companies list.

• Why does it matter if people like the company when they buy products or services?

7. Distribution
 Albums available only on iTunes (or available earlier).
 How does this increase consumer perceptions of the album’s appeal?

8. Service
 Costco return policy

MGMT 449  |    J. Lee 18

Strategic Pricing Considerations
Note**:  The textbook explanation is neither enough nor correct: Firms 

achieving differentiation do not necessarily claim price premiums. 

1. High price
(+)    probably higher margins than competitors
(‐) forego potential market share gains

2. Low price
(‐)     probably lower margins than competitors
(+) gain market share from competitors

Does company prioritize sales, share, or profits?

MGMT 449  |    J. Lee

19

Rivalry
Companies with differentiated 

products establish bases for non‐
price competition.

Threat of Entry
Differentiated products discourage entry because 

of high entry barriers (customer loyalty, 
switching costs)

Supplier Power
Differentiation enables 

companies to pass‐on supplier 
cost increases and also deters 

forward integration.

Threat of Substitutes
The more differentiated the product, the less likely that 

available substitutes are viewed as “perfect” substitutes. 
Customer royalty, switching costs

Buyer Power
Successfully differentiated 
products reduce buyer 
power via greater WTP 

(brand royalty, switching 
costs, less price sensitive).

MGMT 449  |    J. Lee

 Uniqueness that is not valuable

 Too much differentiation

 Too high a price premium

 Differentiation that is easily imitated

 Dilution of brand identification through product line extensions

 Perceptions of differentiation may vary between buyers and 

sellers

MGMT 449  |    J. Lee 20

21

Cost leadership/ Differentiation advantages are more sustainable 
if…
 Source of the advantage is valuable.
 Source of the advantage is rare.
 Source is difficult and/or costly to replicate and substitute.
 Source(s) is(are) systemic (i.e., systems of activities, not just one activity)

Differentiation is more appropriate if…
 Differences perceived by customers lead to greater willingness to pay.
 Inputs may be obtained from numerous, differentiated suppliers.

V.S. Cost leadership is more appropriate if… 
 Industry products and/or services are fairly standardized.
 Product or service inputs are fairly standardized.

MGMT 449  |    J. Lee 22

Low share/high price

ROI

High share/low price

Differentiation Cost leadership

Stuck in the middle?

Competitively superior

Competitively inferior

MGMT 449  |    J. Lee