Nespresso Case Study PDF

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David Rivkin Professor Finkel

Principles of Strategy Nespresso Case Study

BRIEF SUMMARY: ● Brand name of coffee making system developed by Nestle, click of a button high quality coffee-sealed aluminum capsules ● Established as its own company in 1984, ability to brand and market on its own without being “attached” to Nestle INNOVATION PROCESS: INVENTION: Nestle introduced the Nespresso Coffee maker and split it off into its own company called Nespresso. Push of a button high-end machine that instantly brews high quality fresh coffee INNOVATION: Diffusiona) Demand Side - Nespresso originally targeted restaurants in which their machine flopped. Shifted towards the household market and skyrocketed acquiring 220 thousand “club members” across the globe. Along with the machines they had special Nespresso capsules that were placed into the machine to make the coffee. The demand for these capsules resulted in it being the bulk source of Nespresso’s revenue. b) Supply Side- Nespresso took off and it seemed like there were no roadblocks ahead until former Nespresso Head Gaillard made a substitute capsule that was deemed by the UK High Court to have no infringement on Nesspresso’s capsule tech. This was a gut-punch to Nespresso as the capsules were their main source of revenue. Similar rulings followed in European countries as many more players in the capsule segment entered the market EVALUATING THE INNOVATION: (2 examples) Tacitness and Complexity of Technology:  Nespresso’s are not codifiable due to the tech behind the machine creating the perfect temperature and air pressure to properly brew the coffee. This in itself was a great competitive advantage (differentiation) and made it hard for new players to enter the market. However, the coffee capsules are codifiable and right when their patents expired a big wave of new players entered the market creating substitutes for these capsules resulting in a huge slash in revenues. Lead Time:  Nespresso’s 1700 patents created for them an amazing window of lead time and a great Initial Advantage. However, the way they used this lead time was ineffective and ultimately caused them to get hit hard heavy with a storm of competition. In the 20 years that their patent lasted, they did not renovate the capsules enough to create a brand and their weak attempt to form customer loyalty through their Nespresso Club Members group flopped. Customers chose cheaper capsules made by other companies. STRATEGIES TO EXPLOIT INNOVATION: (1 example)Resources and Capabilities of the Firm:  Nespresso’s advantage as a “startup invention” was very clear. Because they were attached to Nestle they had access to money and funds for the producing of their product, marketing, developing, and ultimately mass producing it and selling it. They also had access to Nestle factories and land which gave them the ability to jump right in and start without having to spend time looking for investors, land, factories, machinery to produce the product. MANAGING RISKS: (1 example) Market Uncertainty: N  espresso originally planned to enter the restaurant market- it flopped- and they shifted to the household market which grew them to 220 thousand club members, and helped them move into office buildings as well. They took a risk which failed, then took another risk and it paid off big time.

PEST ANALYSIS: ( 2 examples- P and E)  espresso’s coffee capsules were eventually copied by other companies and when Nespresso tried Political: N to take legal action regarding their patents the UK High Court ruled that there was no infringement on their products. This made it hard for Nestle to fight off competition in the capsule segment which accounted for most of their revenue Economical: The shift in 1980s from restaurants to high-income households resulted in a huge boom in sales and economic activity. Sold in high-end stores targeting a specific customer who could easily afford the product. POV: As much as Nespresso did great things to begin their run and ultimately create a market for high end coffee brewers for the common household, they went wrong in many ways,and I don’t see them being a player in the market they created. Nespresso’s lack of awareness and readiness to take advantage of their Lead-Time, allowed other players to enter the market and eventually “overthrow” them as market leaders through remaking their capsules for a cheaper price....