Innovation and Renovation at the Nespresso Story - Case Study Example

Innovation and Renovation: The Nespresso Story

Introduction

Today’s dynamic business environment demands that firms formulate strategic plans that have particular merits which relate to both internal factors and external factors. As such, the strategic plan should act as a tool for aligning different strategic objectives in a balanced manner so that the strategy bridges between the present situation and the intended future position in line with the corporate vision. Therefore, there is a need to ensure that the three levels of strategic planning namely corporate strategy, business level strategy and operational strategy reinforce each other and act toward the overall strategic plan (Kibachia et al., 2014). Moreover, such an approach may serve as the basis for guiding a firm's competitive plan by focusing on specific strategy such as strategic marketing strategy (Iyamabo & Otubanjo, 2013). Another way to improve organizational performance and competitiveness is through innovation. Highly innovative businesses get higher returns on investments and have higher sales (Dobni, 2010). Throughout its existence, Nespresso has been able to expand and remain resilient mainly through strategic marketing and innovation (Miller, 2000). So as to unravel the Nespresso’s growth, the study below analyses the creative and innovative strategies it has adopted to guarantee its growth.

Question 1

Nespresso is an operating unit of the food industry behemoth Nestle Group. As per 1999, Nestle was the global leader in the food industry, had factories in over 80 countries with 225,000 employees and had annual revenues of over SFr (CHF) 70 billion (Miller, 2000). In 2014, the company operated in 197 countries, had 339,000 employees registered annual revenue of CHF 91.6 billion and had an operating profit of CHF 14 billion (Nestle, 2014). Through ingenious strategies, Nestlé’s numerous brands have been able to establish market leadership in their segments. An integral part of the company’s strategic roadmap is the ensuring internal alignment towards its goals through constant innovation and renovation of its products (Miller, 2000).

At Nestle, innovation entails providing solutions that are beyond customer expectations. However, in the firm, innovation takes a diversion from the traditional approach (Miller, 2000). In many companies, innovation entirely involves a top-down approach whereby top management is the sole initiator of innovation (Bauer, 2014). At Nestle, innovation incorporates both the system and the environment. Anyone in the firm can act as an entrepreneur as long as they can validate the business case since reliable products and market solutions are the lifelines of Nestlé's business. As such, the system accommodates failure as an inevitable part of innovation. On the other hand, renovation in Nestlé's perspective involves the institution of change in the same pace as the customer expectation and demands. Therefore, it is based on continuous improvement of processes such as aligning the marketing processes with the customer trends (Miller, 2000). Through innovation and renovation, the firm avoids the traditional approach whereby companies view value creation in a narrow perspective leading to the optimization of the short-term performance thus ignoring the critical customer needs and factors that determine long-term success (Porter& Kramer, 2011).

Question 2

Nespresso is an integral part of Nestlé’s growth strategy. The company has been able to productize Nespresso successfully due to various macro and micro environment factors. So as to fully understand Nespresso’s macro-environment factors, it is essential to undertake the PESTL analysis. The model involves the analysis of political, economic, social, technological and legal external dynamics influencing a company (Gupta, 2013). First, political considerations have far reaching implications on Nespresso. In a bid to avoid conflicting interests with Nestle, it was necessary for the creation of an entirely independent unit that would be responsible formulate its workforce, commercial and distribution policies. This approach is valid since although Nestle is already a market leader in the instant coffee segment, Nespresso is more focused on the upmarket coffee segment. Besides, Nespresso’s business model and organizational value and attitudes are different to Nestlé’s (Miller, 2000).

Second, economic factors encouraged the productization of Nespresso. Restaurants coffee consumption creates a customer base that is willing to pay high amounts so as to attain the coffee shop experience. The customers are willing to pay as high as SFr 900 for the Nespresso machines. The purchase of the machines guarantees that they can only use the Nespresso capsules thereby locking them into a closed system where the firm controls the price. Third, social factors are influential to Nespresso’s model. The company's premium positioning is as a result of the affluent customer base that focuses on sophistication. Such a segment seeks a brand such as Nespresso that guarantees the feeling of elegance and style by ensuring exclusivity and differentiation from the other coffee brands (Miller, 2000).

Fourth, the technological considerations support Nespresso’s model. The rapid development of the premium –end coffee segment necessitates the development of technology that places high attention on the coffee roasting process and brewing stage. As such the firm’s Research and Development (R&D) process develops innovative technologies that ensure that products are in line with the premium-end coffee customer demands. Lastly, legal factors are essential the Nespresso’s model. The presence of universal patent laws ensures that no competitor can counterfeit the Nespresso’s concept. Also, the firm licenses the production to several companies, and the Nespresso machines retail at particular home appliances stores. Therefore, the model ensures control over quality thus leading to customer loyalty (Miller, 2000).

So as to understand the microenvironment factors that support the productization of Nespresso, it is essential to employ the Porter’s Five Forces Model. The model entails gaining insight an industry’s profitability and attractiveness in an outside-in scope. The analysis uses five factors namely; the industry competitiveness, likelihood of new entrants, the power of suppliers, the leverage of customers and threat of alternative products (Dalken, 2014). First, the competition in the household segment is minimal since Nespresso commands a market share of over 90%. Second, the potential of new entrants in the portion coffee market is minimal since Nespresso concept is highly technical. Besides, the firm holds patents for its innovative system and has broad technical experience, huge market share, and the Nespresso Club. However, resource-endowed food companies such as Sara Lee may challenge Nespresso though at a very gradual pace since it may take up to four years for a new entrant to gain a significant market share (Miller, 2000).

Third, the suppliers in the portion coffee segment wield minimal leverage over the firms. For example, Nespresso gains dominance over the machine manufacturers by restricting the standardized designs. Fourth, customers have high leverage in the premium-end segment hence necessitating firms such as Nespresso to offer individualized services to ensure customer retention. Lastly, the threat of substitute products is minimal. Brands in the portion coffee segment encompass sophistication and therefore depend on the luxury image which fuels customer loyalty. For example, due to the focus on premium-end coffee, it is hard to substitute espresso with Nestlé’s instant coffee (Miller, 2000).

Several internal factors which are examinable using the resource Audit Model enable Nestle to productize Nespresso. First, Nestlé’s financial muscle serves a determinant of Nespresso's system success. For example, in the initial stages of the Nespresso, Nestle had to cover the costs of the maintenance costs of repairing the machine defects a factor that may have boosted customer loyalty. Besides setting an independent business unit and ensuring robust R&D process requires high investment. Second, the human resources of at Nespresso offers the firm a chance for rapid growth. Individuals such as Willem Pronk are innovative, resilient and fully support Nespresso’s business model. Lastly, Nestles intangible resources such as influence and power are essential to ensure the success of the Nespresso’s market approach. For example, forming marketing partnerships with companies such as Swissair and Cathay Pacific may require a highly level of corporate influence and power (Miller, 2000).

Question 3

Nespresso has had to contend with various strategic challenges to achieve growth. First, the highly segmented Nespresso’s target market curtails the use of mass marketing techniques. Mass marketing techniques although famous with other Nestle brands would not work for Nespresso’s products. As such, the firm has had to implement unproven marketing strategies such as Nespresso Club, which is highly individualized. Second, in initial stages, the company faced challenges in ensuring freshness of the packed coffee and consistency in quality. Such limitations were highly detrimental since the firm sought to use quality as the basis of marketing strategies (Miller, 2000).

Third, in the initial stages, the distribution criterion of the capsules through retail outlets was largely defective. It took half of the capsules’ shelf-life to be stocked. The short-shelf life meant that it was hard to guarantee their quality. Fourth, the lack of conclusive market research on the household market was a huge impediment during the initial stages. It is hard to predict essential market patterns and trends which are critical in formulating responsive marketing strategies. Fifth, the firm faces the challenge of incorporating non-coffee products. For optimal growth, the introduction of new individually-portioned products such as tea may increase usage of Nespresso system by the current customers and also attract new customers. However, such an approach may be detrimental to the firm’s brand strategy which is highly entwined with exclusivity and focus on coffee (Miller, 2000).

Question 4

Nespresso has adopted various strategies to enter the market and ensure growth. The firm has adopted differentiation as its generic strategy. Nespresso targets on a narrow portion of the espresso coffee. Through the differentiation, the firm has been able to align its processes to ensure its products, customer services, and machines are of high quality. The strategy has guaranteed that Nespresso is a distinctive brand with luxury image and which concentrates on offering lifestyle trough its products. Through its Nespresso Club, the customers join an exclusive club that guarantees premium services. As such, the firm has maintained leverage over its competitors since it can fulfil all the expectations of a premium-end coffee customer (Miller, 2000). It is worth noting that a generic strategy’s purpose is to institute, maintain and grow a firm’s competitive advantage (Haapalainen & Skog, 2011).

The company has also adopted three primary strategies in its market entry and expansion. First, the company embraced a diversification strategy to enter the market. Nespresso introduced a new product that targeted a new market. The diversification entailed a trial and error approach whereby the company initially focused on restaurant and office segments before shifting to the household market. Second, through licensing strategy, the company can concentrate on offering its customers quality products and expanding. Although the firm does not gain profits on machine sales, Nespresso can focus on production of capsules which have profit margins of 50%. Besides, by licensing machine manufacturing, Nespresso avoids massive investments in their production and also relies on the technical experience of the licensees. Lastly, to achieve rapid growth the firm has been using the market penetration strategy. Under this strategy, Nespresso has focused on growing its market share in the household market. As such through the Nespresso Club, the firm adopted an ingenious marketing solution responsive to the ideal customer base (Miller, 2000; Haapalainen & Skog, 2011).

Question 5

Nespresso should consider targeting the restaurant segment to ensure growth. The majority of espresso consumers drank it away from home. People drink less espresso at home mainly due to lack of ownership of the espresso making machines which many people perceive as expensive. Also, in countries such as the US, consumers still widely use the electric drip coffee makers. Given these dynamics, targeting restaurant segment is essential since by serving many people, the initial cost of machine acquisition is neutralized. Also, since the customer awareness through the word of mouth accounts to 60% of the new customers, restaurants may act as essential marketing channels for the household segments hence boosting sales. Such an approach is valid since Nespresso model depends on the entire concept and not only the purchase of machines. As such, it is worth noting that consuming Nespresso products is an integral part of the firm’s concept which may act as a strong marketing mechanism (Miller, 2000).

Reference List

Baurer, W. (2014). A New Approach to Innovation at Nestle R&D. Thunderbird International Business Review, 56(1), 111-116.

Dalken, F. (2014). Are Poter's Five Competitive Forces Still Applicable? A Critical Examination Concerning the Relevance of Today's Business. Enschede: University of Twente.

Dobni, C. B. (2010). Achieving Synergy between Strategy and Innovation: The Key to Value Creation. International Journal of Business Science and Applied Management, 5(1), 48-58.

Gupta, A. (2013). Environmental and PEST Analysis: An Approach to External Business Environment. Merit Research Journal of Art, Social Science and Humanities, 1(2), 013-017.

Haapalainen, V., & Skog, N. (2011). Growth Strategies of Multinational Companies: Jewelry Retail Industry. Jyväskylä: JAMK University of Applied Sciences.

Iyamabo, J., & Otubanjo, O. (2013). A Three-Component Definition of Strategic Marketing. International Journal of Marketing Studies, 5(1), 16-33. doi:10.5539/ijms.v5n1p16

Kibachia, J., Iravo, M., & Luvanda, A. (2014). A Survey of Risk Factors in the Strategic Planning Process of Parastatals in Kenya. European Journal of Business and Innovation Research, 2(3), 51-67.

Miller, J. (2000). Innovation and Renovation: The Nespresso Story. Lausanne: International Institute for Management Development.

Nestle. (2014). Annual Report 2014. Vevey: Nestle Group. Retrieved May 14, 2016, from https://www.nestle.com/asset-library/documents/library/documents/annual_reports/2014-annual-report-en.pdf

Porter, M. E., & Kramer, M. R. (2011). Creating Shared Value: How to Reinvest Capitalism and Unleash a Wave of Innovation and Growth. Harvard Business Review, 63-70.