Strategy in Practice: The Nespresso Example
In early 1988, Mr. Jean-Paul Gaillard had just taken over the Nespresso subsidiary which, despite selling one of Nestle’s most innovative new products, was facing serious financial problems. He therefore had to decide how to rejuvenate the subsidiary’s financial fortunes by developing a new strategy.
The Nespresso product was a system, which allowed the consumer to produce a fresh cup of espresso coffee at home. Though simple in appearance and use, it took Nestle more than ten years to develop it. The system consisted of two parts: a coffee capsule and a machine. The coffee capsule was hermetically sealed in aluminum and contained 5g of roast and ground coffee. The machine consisted of four parts-a handle, a water container, a pump and an electrical heating system. These four parts were cast into a body and formed the ...view middle of the document...
This joint venture (named Sobal-Nespresso) was supposed to purchase the machines from another Swiss Company (called Turmix), the coffee capsules from Nestle and then distribute and sell everything as a system-one product, one price. Offices and restaurants were targeted as the customers and a separate unit called Nespresso SA was set up within Nestle to support the joint venture and to service and maintain the machines.
By 1988, it was clear that the new product was not living up to its promise. Sales were well below budget and quality problems were driving costs through the roof. Nestle headquarters was considering freezing the operation when Jean-Paul Gaillard took over. He had to decide whether and how to strategically reposition the subsidiary.
But which way should he go? At the top of his “to-do” list were questions such as: “Should we continue targeting offices and restaurants as our customer or should we focus on upper-income households and individuals?” “Should we continue focusing our activities in Switzerland or should we expand in other espresso-friendly countries?” “Should we stick to our current strategy of selling both the coffee and the machines as a system or should we just concentrate on coffee?” “Does our current distribution policy make sense or should we choose an alternative distribution method such as the Internet or mail order?”
These were not easy questions and the answers were not immediately obvious. Yet, these questions had to be asked, possible alternatives identified and specific choices made. In fact, going through the process of asking these questions and then making difficult choices (which may turn out to be wrong) is what strategy is all about.
As it turned out, Jean-Paul Gaillard chose correctly for Nespresso. He changed the targeted customer from offices to high-income households and the distribution of the coffee capsules from the joint venture to mail order (through the “Nespresso Club”). As a result of these choices and other strategic decisions, Nespresso grew tremendously in the next five years. *
* Adapted from Business Strategy Review, 2001, Volume 12 issue 3 P3