Wednesday, November 13, 2013

Nespresso and The Power of Coherence


In the case study, The Coherence Premium we learnt that companies that align their capabilities with the right market opportunities experience superior and sustained growth. Nespresso is a leading example of how coherence can help achieve sustained growth and high revenues.
Nespresso is one of Nestlé’s fasting growing brands with annual revenue of $4.3 billion for 2012. [1]

Overview:
Nestle was dominant in the coffee market in the 1970’s. In 1976, Eric Favre invented and patented the Nespresso system. The company then tried to reach offices and restaurants but did not generate revenues. [2]
This failure took a major toll on the Nestlé’s resources. Finally, Nespresso was established as an independent firm in 1986. Later, a new CEO Jean-Paul Gaillard was appointed and his new strategy helped Nespresso become the leader in the dedicated espresso coffee machine market. [3] Nespresso’s business model is shown in Picture 1.

Three questions that a coherent company must answer
The case study, The Coherence Premium lists three questions that a coherent company must answer. Let’s take a look at how Nespresso answered these questions:
1.   What are we going to sell and to whom?
Nespresso would sell coffee-pod machines and coffee pods to high-end consumers. Today, these pods are available in 16 different flavors.
Initially, Nespresso targeted offices and restaurants. After experiencing failure by serving this market segment, Nespresso changed its focus and started targeting the niche household market. In this way, they aligned their capabilities with the right market. Nespresso’s pods were exclusive since they were patented. Customers who purchased these machines were locked into buying pods sold only at Nespresso.

2.   How are we going to face the market?
Nestle would create value for their customers by providing the convenience of making consistent and good quality coffee at home. Also, it was marketed as a niche brand and became a status symbol.
 Nespresso launched Nespresso Club that offered a range of exclusive and personalized customer service. Nespresso Club earned Nespresso the label of a customer service king and became a distinctive feature of Nespresso. [4]
According to Nir Wegrzyn, CEO of design agency BrandOpus, Nespresso Club gives customers "a sense of cultural belonging that taps directly into the sophisticated global lifestyle they seek to achieve". [5]
To establish a high-end brand reputation, Nespresso also launched modern and stylish boutique stores internationally at upscale locations. Nespresso’s also launched an online store to sell its products online.

3.   What capabilities do we need?
Nespresso’s capabilities system consisted of the following:
1.   Focus on innovation and renovation. (Patented pods and coffee pod machines, adding new pod flavors etc.)
2.   Excellent customer service capabilities (especially in their boutique stores).
3.   Distinguished coffee manufacturing abilities.
4.   Effective marketing and distribution channels.

Nespresso was able to earn high revenues and growth through identifying the right market for its coffee pod machines. Today, Nespresso coffee pod machines can also be found at significant number of Michelin-starred restaurants around the world. [6]
The sale of the patented coffee pods comprises a significant portion of Nespresso’s revenues. However, the patent for these pods has expired and a High Court ruling has prohibited Nespresso from keeping them exclusive.  How do you think this will impact Nespresso?

                         Picture 1: Nespresso's Business Model
                         Source [3]

REFERENCES:

[1] Boyle, Matthew. "Nestle's Nespresso Growth Hit by Swiss Contender Migros: Retail."Bloomberg.com. Bloomberg, 21 Apr. 2013. Web. 13 Nov. 2013. <http://www.bloomberg.com/news/2013-04-21/nestle-s-nespresso-growth-hit-by-swiss-contender-migros-retail.html>.
[2] Tan, Michaela. "Nespresso, What Else?: The History of Nespresso." Nespresso, What Else?: The History of Nespresso. N.p., 19 Jan. 2012. Web. 13 Nov. 2013. <http://micha-hhs.blogspot.com/2012/01/history-of-nespresso.html>.
[3] "Nespresso History and Case Study." Nespresso History and Case Study. N.p., n.d. Web. 13 Nov. 2013. <http://www.ecommerce-digest.com/nespresso-case-study.html>.
[4] "Our History." Nestlé Nespresso:. N.p., n.d. Web. 13 Nov. 2013. <http://www.nestle-nespresso.com/about-us/our-history>.
[5] "The Rise of the Coffee Pod Machines." The Guardian. N.p., n.d. Web. 13 Nov. 2013. <http://www.theguardian.com/lifeandstyle/wordofmouth/2013/apr/10/rise-coffee-pod-machines-nespresso>.

[6] Rainey, Clint. "Grub Street." New York. N.p., 21 Mar. 2013. Web. 13 Nov. 2013. <http://www.grubstreet.com/2013/03/nespresso-sold-at-michelin-starred-restaurants.html>.

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