READ THE EXCERPT BELOW, WATCH THE VIDEO AND ANSWER THE FOLLOWING QUESTION ONTO THE POWERPOINT SLIDE:

In the powerpoint file attached, you are only responsible for answering the question on the second slide which is:

• What insights into the innovation process can be gained from this case?

Nespresso is the brand name of a coffee brewing system developed in the late 1970s by Nestlé, the multinational food company founded and headquartered in Switzerland. Nespresso allows consumers to brew high?quality coffee at the push of a button by placing hermetically sealed, aluminium covered, coffee capsules into a specially designed machine. While the idea sounds simple, the technology behind Nespresso is, in fact, complex because it requires air and water to be passed through ground coffee at the right temperature and pressure. At the time of its development, Nespresso constituted a major departure for Nestlé from its core operations that were based on the large?scale production and mass marketing of food products. In the late 1970s Nestlé’s presence in the coffee market centred on instant coffees with products like Nescafé accounting for 80% of its revenue from coffee sales. Early development The original technology underpinning Nespresso was developed by the Battelle Institute, an independent research organization based in Geneva,58 but Nestlé acquired the rights to develop the idea commercially in 1974 and went on to file a large number of patents on the product.59 Camillo Pagano, who was at that time the senior executive in charge, felt that the product had potential despite the fact that sales in the coffee market were sluggish. At the time, the gourmet coffee market was beginning to expand and Nestlé saw Nespresso as a vehicle by which it could expand coffee sales by moving into the restaurant market. Many of Pagano’s colleagues were sceptical about the innovation, questioning whether Nespresso could be commercialized and expressing concern about the amount of time and effort that would be taken up in launching such a niche product that had a poor fit with Nestlé’s mainstream operations. Pagano felt that in order to flourish the Nespresso project needed to be taken outside Nestlé’s day?to?day operations so, in 1984, he established Nespresso as a separate company (100% owned by Nestlé) which was free to develop its own marketing, operations and personnel policies. Nespresso developed its system in conjunction with a number of partners: it collaborated with a Swiss company to improve the design of the machines; it licensed the manufacture of the machines to Turmix, a Swiss domestic appliance manufacturer; it partnered with Sobal, a distributor, to sell the product to end?users. The Nespresso system was launched in 1986 in Italy, Switzerland and Japan but the product flopped. By the end of 1987, only half the machines that had been manufactured had been sold and without sales of machines there could be no sales of the specially designed capsules. It looked very likely that Nestlé headquarters would kill off the project but it was decided to give it a further chance by bringing in an outsider to see whether a turnaround could be effected. The person selected for this role was Jean?Paul Gaillard, a former executive with Philip Morris, the tobacco company.60 The turnaround Rupert Gasser, head of research at Nestlé, described Gaillard as ‘ambitious and strong headed. He wanted to do something outstanding. [Gaillard] had personality; he was a force. And ?

importantly, he did not carry all the trappings of the company history.’ 61 Gaillard made a number of changes, the most important of which were: ? Changing the customer focus: Gaillard reasoned that the Nespresso system was more suited to the household than the restaurant market. Although his intuition was not supported by explicit market research, market trends in the late 1980s pointed in that direction. Gaillard’s strategy was to target high?income households and, in line with that strategy, he sought to ensure that the coffee machines were retailed through high?end stores. ? Establishing a direct channel to the end?users through the establishment of Nespresso Clubs: selling Nespresso coffee capsules through supermarkets did not fit well with the exclusive brand image Gaillard wished to create, and so he had the idea of establishing the Nespresso Club. When households bought a machine, they automatically became members of the Club that offered around?the?clock ordering of coffee capsules, prompt delivery of orders and advice on coffee making and machine maintenance. The Club had the additional advantage of providing the company with up?to?date customer information. ? Positioning the brand at the top end of the market: the company developed partnerships with kitchen appliance makers such as Alessi, Krups, Magimix and Philips to produce well? designed machines sold through upmarket retail outlets. By the time Gaillard left Nespresso in 1996, sales had taken off and there were 220 000 club members across Europe. After Gaillard’s departure, Nespresso continued to grow as it expanded geographically, extending its target market into small offices and businesses and widening it range of coffee capsules. The range of machines was increased to offer a number of sophisticated design options and the company opened a number of retail outlets – Nespresso boutiques – that sold coffee?related paraphernalia as well as the Nespresso system. Augmenting a marketing campaign that relied heavily on social media, Nespresso launched a long?running and successful television and billboard advertising campaign featuring George Clooney to further promote the product. By 2014, Nespresso had estimated annual sales of SFr 4 billion (US$4.5 billion), margins on earnings before interest and tax (most of which came from pods rather than machines) of more than 30% and accounted for around 8% of Nestlé’s total operating profit.62 More recent challenges As might be expected, the success of Nespresso paved the way for new competitors to enter the market. Despite having more than 1700 patents on Nespresso capsules and machinery, more than 20 years had elapsed since the product was first developed and early patents were beginning to expire. In addition, the product had proved relatively simple for new players to re?engineer without infringing Nestlé’s patents. Nonetheless, Nestlé had built a strong brand and was the global market leader (Table 6.4). However, in the US Keurig, part of Keurig Green Mountain, and its K?Cup system dominated the market, with several other players, including both Starbucks and Walmart entering this market. In 2014, Nespresso launched its VertuoLine range designed to make the larger coffee servings preferred by Americans. The bulk of the profit from single?serve pod coffee makers came from selling capsules rather than the machines themselves and this opened up a second route for new entrants. A number of companies, including one set up by Nespresso’s former head, John?Paul Galliard, started selling substitute coffee pods for Nespresso machines. Nestlé robustly defended its property rights but in a landmark case in 2013 the UK High Court ruled that Dualit, a UK manufacturer of small domestic appliances, had not infringed Nestlé’s patents by making substitute capsules for its Nespresso regime. Similar rulings followed in test cases in other European countries with significant repercussions for the viability of Nespresso’s business model. Nespresso and other makers of pod coffee machines also found themselves under increasing pressure from environmental campaigners, who highlighted the fact that capsules were difficult to recycle and added to waste and environmental damage. Nespresso launched a recycling campaign allowing consumers to return the single?use aluminium containers in special bags but this did little to dampen criticism. By 2014, Nespresso was faced with a number of dilemmas with regard to its future direction. Could it sustain rapid growth in the face of increasing competition? Was it possible for Nespresso to retain and develop its exclusive image or should it move downmarket to increase its target market? Should Nestle re?integrate Nespresso into its mainstream organization to stimulate a new wave of innovation?