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Who am I?Work:
• 13 years in banking
(USA)
• 3 years in brand
management
(Germany)
• Past 12 years in
management education
(Hungary, Romania,
Netherlands)
• 20+ years in marketing
& strategy
Countries:
• USA
• Sweden (University)
• Germany
• Romania
• Hungary
• Netherlands
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Who am I?
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Strategy????
What do you think we will
learn in the Strategy Course?
What did I think in my MBA?
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Why Coffee?
Why Keurig?Let me explain…
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Europe…
Philips
Senseo
Nescafe
Nespresso
Kraft Foods
Tassimo
Nescafe
Dolce Gusto
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But I return to the USA in 2012 to find….
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Coffee shops make up the FASTEST GROWING part of the restaurant
business, checking in with a 7% annual growth rate!
World coffee production is estimated at 130 - 140 million bags per
year!
Expected to increase to 175 million bags by 2020
14 billion espresso coffees are consumed each year in Italy, reaching
over 200,000 coffee bars, and still growing!
Americans consume 400 million cups of coffee per day, or equivalent
to 146,000,000,000 (146 Billion) cups of coffee per year; making the
United States the LEADING CONSUMER of coffee in the world.
Japan ranks number 3 in the world for coffee consumption.
Coffee is the world’s second largest commodity, after petroleum.
(All data from 2015)
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What’s the link between Coffee
and Strategy?
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What is strategy?
“Management is not just passive, adaptive
behavior… It means taking action to make
the desired results come to pass.”
Peter Drucker, The Practice of Management
“Strategy […] is largely a pipe dream. Why?
Because you can sit in a boardroom and plot
all you’d like, but once the game has
started, it’s pretty much improvisation from
that point forth.”
Duff McDonald, The Firm,
The Inside Story of McKinsey
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The summation of Strategy
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The Value Equation
Value = Perceived Benefits / Cost
(V=PB/C) If Value is greater than or equal to 1, then a customer will tend to
purchase the product given
The customer is aware of the product
There are no substitutes for which Value is even greater than your
product.
The customer can afford the Cost of the product
Benefits = Perceived Benefits
Function(s)
Status
Brand
Other?
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The Communication Process
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Competitive Advantage
Definition: the ability to create more economic
value than competitors
Mission Objectives
External
Analysis
Internal
Analysis
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THE STRATEGIC MANAGEMENT PROCESS
External and Internal Analysis
External Analysis
Systematic Examination
of the Environment
Internal Analysis
• interest rates
• demographics
• social trends
• technology
• human resources
(knowledge)
• manufacturing
abilities
• technology
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Competitive Advantage
Definition: the ability to create more economic
value than competitors
Mission Objectives
External
Analysis
Internal
Analysis
Strategic
Choice
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THE STRATEGIC MANAGEMENT
PROCESS
Strategic ChoiceExternal
Analysis
Internal
Analysis
Strategic
Choice
Business
Level
Corporate
Level
Positioning a
business
Which
businesses?
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Competitive Advantage
Definition: the ability to create more economic
value than competitors
Mission Objectives
External
Analysis
Internal
Analysis
Strategic
Choice
Strategy
Implementation
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Strategy Implementation (Marketing)
• how strategies are carried out
• who will do what
• organizational structure and control
• who reports to whom
• how does the firm hire, promote, pay, etc.
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A Strategy Is Only As Good As Its
Implementation
Strategy Implementation
• every strategic choice has strategy implementation
implications
• strategy implementation is just as important as
strategy formulation
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The Strategic Management Process
Competitive Advantage
Definition: the ability to create more economic
value than competitors
Mission Objectives
External
Analysis
Internal
Analysis
Strategic
Choice
Strategy
Implementation
Competitive
Advantage
Marketing
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Competitive Advantage
Definition: the ability to create more economic
value than competitors
- all other elements of the strategic management
process are aimed at achieving competitive
advantage
Mission Objectives
External
Analysis
Internal
Analysis
Strategic
Choice
Strategy
Implementation
Competitive
Advantage
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The Tools of strategy…
“Strategic GPS Satellites”
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VRIO – (WHY)
Internal and External Data
Qualitative
SWOT – (WHAT)
Internal (SW) and External (OT)
Qualitative
Extended SWOT – (HOW)
Use the SWOT Data
Qualitative
5-Forces + 1 – (WHAT)
External Data
Qualitative
GE / BCG Matrices – (WHERE)
Internal and External Data
Quantitative
CAGE Analysis – (WHERE)
External Data
Qualitative
PEST(EL) – (WHERE/WHEN)
External Data
Qualitative
Porter’s Diamond – (WHY)
External Data
Qualitative
BCG Diamond – (HOW)
Internal Data
Qualitative
Innovation Types – (HOW)
Leading Change – (HOW)
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VRIO (WHY)
VR
IO F
ram
ew
ork
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SWOT (WHAT)
SW
OT
An
aly
sis
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ENHANCED SWOT (HOW)
Translate into tasks for the
Project Plan Strengths Weaknesses
Opportunities
How do I use these strengths
to take advantage of these
opportunities?
How do I overcome the
weaknesses that prevent me
taking advantage of these
opportunities?
Threats
How do I use my strengths to
reduce the likelihood and
impact of these threats?
How do I overcome the
weaknesses that will make
these threats a reality?
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5 FORCES + 1 (WHAT)
Fiv
e F
orc
es M
od
el
Complementors
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BCG MATRIX (WHERE/WHAT)
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GE MATRIX (WHERE/WHAT)
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CAGE ANALYSIS (WHERE)
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PESTEL (WHERE/WHEN)
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BCG GLOBAL ADVANTAGE
DIAMOND (HOW)Growth Advantage
Resource Leverage Advantage
“Manyness”
Advantage
Integration
Advantage
Market
Access
Resource
Access
Local
AdaptationNetwork
Coordination
• Talent
• Assets
• Raw Materials
• Knowledge
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Competitive Advantage
A product differentiation strategy must meet the
VRIO criteria…
Is it Valuable?
Is it Rare?
Is it costly to Imitate?
Is the firm Organized to exploit it?
…if it is to create competitive advantage.
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VRIO
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VRIO Breakdown
Value
“Do Resources and Capabilities:
Exploit an external opportunity
Neutralize an external threat?
(Enhanced SWOT?)
Cost (i.e. - Keurig Brewer)
Rare
“How many competing firms already possess particular valuable resources and capabilities?”
Patented
Imitability
“Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?”
Organization
“Is a firm organized to exploit the full competitive potential of its resources and capabilities?”
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Organizational Support in the
VRIO Model…
Founded 1970
Locations (4,960 km apart):
Xerox headquarters: New York
Parc headquarters: California
Innovations
The personal computer
Laser printers
Computer-generated bitmap graphics
The Graphical user interface, featuring windows and icons,
The computer ‘mouse’
The WYSIWYG text editor
Ethernet as a local-area computer network
4,960 km apart
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VRIN?
N = Non-Substitutibility
Product or Service Substitution
Postal Service -> Email
Record Store -> iTunes
GPS unit -> iPhone app
Competence Substitution
Skilled workers -> Automation/Machines
Translators -> Google Translate
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Strategy Exercise
Create a VRIO for your companyWal-Mart
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“The Big Lie of Strategy”
Overview: Strategy is what compels customers to
give the company its revenue.
Planning, Cost Control and Capabilities are what determine
whether the revenue can be obtained at a price that is
profitable for the company.
Comfort Traps
1. Strategic Planning
Strategy <> Planning: Planning does not question
assumptions.
2. Cost-Based Thinking
Revenues cannot be planned like costs
3. Self-Referential Strategy Frameworks
Strategy is about your customers, not your firm.
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“The Big Lie of Strategy” Escaping the Traps
1. Keep the Strategy Statement Simple
Which customers to target
How to create a value proposition for these
customers
2. Recognize that Strategy is not about perfection
Strategy is a ‘bet’
3. Make the logic explicit
What do you believe about the customer?
What do you believe about the evolution of the
industry?
What do you believe about the competition?
What do you believe about your firm’s capabilities?
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Competitive Advantage
Definition: the ability to create more economic
value than competitors
- all other elements of the strategic management
process are aimed at achieving competitive
advantage
Mission Objectives
External
Analysis
Internal
Analysis
Strategic
Choice
Strategy
Implementation
Competitive
Advantage
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Strategy review
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Strategy Review
“Choose Markets Wisely”
Corp
ora
te L
evel Str
ate
gie
sVertical Integration*
Diversification
Strategic Alliances*
Mergers & Acquisitions*
Global Strategies….
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Strategy Review
“Compete Fiercely”
Busi
ness
Level Str
ate
gy
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Strategy Review
“Specialize Effectively”
Functi
onal Str
ate
gie
s
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The Ability to Create More Economic
Value Than Competitors
• there must be something different about a
firm’s offering vis-à-vis competitors’offerings
• if all firms’strategies were the same, no firm
would have a competitive advantage
• competitive advantage is the result of doing
something different and/or better than
competitors
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Temporary & Sustainable
• competition limits the duration of competitive
advantage in most cases
• profits attract competition
• competitive advantage typically results in
high profits
Therefore,
• most competitive advantage is temporary
• competitors imitate the advantage or offer
something better
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Temporary & Sustainable
Some competitive advantages are sustainable if:
• competitors are unable to imitate the source
of advantage
• no one conceives of a better offering
Of course,
• in time, even sustainable competitive
advantage may be lost
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Competitive Parity
• the firm’s offerings are ‘average’
• people do not have a preference for the firm’s
offering
• the firm does not have a cost advantage over others
• some things that may lead to competitive parity
may still be critical to success (e.g., telephones)
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Competitive Disadvantage
• people may have an aversion to the firm’s
offering
• the firm may have a cost disadvantage
• a firm may have outdated technology/equipment
• a firm may have a negative reputation
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Emergent vs. Intended Strategies
• the strategic management process leads
managers to intended strategies
However,
• conditions often change or new information
becomes available
• managers respond and adopt emergent strategies
Example: Honda Motorcycles
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Summary
Firms could achieve competitive parity and survive
• they would face a flat demand curve
• their cost structure would be the industry average
• they would need to adapt their strategy over
time just to survive
• they would fail if they didn't adapt their strategy
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Summary
This course is not about mere survival, it is about
thriving—achieving competitive advantage
• the strategic management process helps managers
achieve competitive advantage
• competitive advantage depends on differences
• strategy is about discovering and exploiting
these differences
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Business Level Strategies
Two Generic Business Level Strategies
Cost Leadership:
• generate economic value by having lower
costs than competitors
Product Differentiation:
• generate economic value by offering a
product that customers prefer over
competitors’product
Example:
Example:
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Product Differentiation
A business level strategy intended to:
• increase the perceived value of
the focal firm’s products and/or
services relative to the value of
competitor’s products and/or
services
• create a customer preference
for the focal firm’s products
and/or services
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Cost Differentiation
A business level strategy
intended to:
• focus on gaining advantages
by reducing its costs to below
those of all its competitors.
• a firm must also focus on other
competitive advantages, if
reducing cost is the ONLY focus,
no one will want the product.
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Bases of Differentiation
A base of differentiation must fill some
customer need:
• image
• status
• comfort
• taste
• beauty
• style
• furthering a cause
• reliability in use
• safety
• nostalgia
• cleanliness
• service • accuracy
• hunger
• belonging
A differentiated product fills one or
more needs better than the products of
competitors
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Vertical or Horizontal Differentiation
Horizontal Differentiation
Product value is evaluated differently by
different consumers
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Vertical or Horizontal Differentiation
Vertical Differentiation
All consumers evaluate products
equally, placing higher value on
higher quality products
Horizontal
Differentiation
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Bases of Differentiation
Three Categories
1) Product Attributes
2) Firm—Customer Relationships
3) Firm Linkages
• exploiting the actual product
• exploiting relationships with customers
• exploiting relationships within the firm
and/or relationships with other firms
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Bases of Differentiation
Product Attributes
• Product Features – the shape of a golf club head
• Product Complexity – multiple functions on a watch
• Timing of Introduction – being the first to market
• Location – locating next to a freeway exit
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Bases of Differentiation
Firm-Customer Relationships
• Customization – creating a unique diamond
bracelet for a customer
• Consumer Marketing – creating brand
loyalty to a soap through image advertising
• Reputation – sponsoring the local homeless
shelter to engender positive community
response
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Bases of Differentiation
Firm Linkages
• Linkages among Functions in the Firm
– using a circuit board designed in one
division in other divisions
• Linkages with other Firms – a sporting
goods store sponsors a benefit race by
donating running shoes and receives
free radio advertising in return
• Product Mix – a furniture store begins to
sell home gym equipment, computers, and
lawn mowers
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Bases of Differentiation
Firm Linkages
• Distribution Channels – a doughnut shop begins to
sell its doughnuts through gas stations
• Service and Support – an oil
change shop begins to offer pick
up and delivery of cars in an office
building’s parking garage
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Fragmented Industry
Branding: commodity differentiated product
Example: Converse Sneakers
Emerging Industry
First mover advantages: captures market share
Example: Google Android
Exploiting Industry-type Opportunities
The Value of Product Differentiation
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Exploiting Industry-type Opportunities
Mature Industry
Refining product or adding services
Example: Virgin
Declining Industry
Exploiting niches: serving those with strong needs
Example: NEWT at the Royal Hawaiian
The Value of Product Differentiation
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Exploiting Other Opportunities
Trends or Fads
• accessories
for mobiles
Government Policy
• Toyota Prius
• airport x-ray machines
Social Causes
• themed credit cards
• organic products
Economic Conditions
• car warranties
• holiday homes in Spain
The Value of Product Differentiation
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Imitability of Product Differentiation
Substitutes
• some substitutes may be obvious
• some substitutes may not be obvious
• if no substitutes are obvious, then we would
conclude that imitation through substitution
will be costly—at least for the present time
• if a base of differentiation is valuable, others
will attempt to imitate it through duplication
and/or substitution
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Summary
• product differentiation creates customer preferences
• preferences allow firms to make above normal profits
• almost anything can be a base of differentiation
• bases of product differentiation that meet the
VRIO criteria may generate competitive advantage
• a product differentiation strategy is only as good
as its implementation
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“Stuck in the Middle”
It can be argued that firms should either pursue a
cost advantage or a benefit advantage but not
both.
Firms that pursue both could, according to this
argument, get stuck in the middle and have
neither advantage.
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Stuck in the Middle?
In reality, however, successful firms appear to have both types of advantages.
Firms that offer high quality products expand market share and enjoy cost advantages due to economies of scale and learning
Learning economies may be more important for high quality production than for low quality production
High quality producers may also be more efficient producers
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“Stuck in the Middle”
Trying to attain excellence in all dimensions often
leads to unfocussed decision making.
Trying to achieve cost advantage and benefit
advantage may lead to uninspired imitation of
“best practices.”
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What do Starbucks and Keurig have in
common?
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Q: What is the difference between a
‘strength’ and a ‘competitive
advantage’?
A: Strength : A positives feature, attribute or asset
(e.g experienced staff / Better marketing tools, etc.)
Competitive Advantage : Absolute Strength over competitor, something unique
and its value is considered.
Sustainable competitive advantage : competitive advantage over a longer
period of time, something like a major breakthrough in technology usage which is
not available or will not be available (such as google seach engine database) or a
patented technology or process.
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Innovation as a
strategy
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Incremental Innovations
When there are minor changes in
technology, they are either simple
product improvements or line
extensions that minimally improve the
existing performance.
• Toothbrushes
• Shampoo
• Cars
• Printers
• Coffee makers (alarm clock built-in)
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Breakthrough innovations
They are novel, unique or state-of-the-art
technological advances in a product category
that bring changes in the consumption
patterns of a market.
There are two types:
• Growth of existing technology which can
also be defined as "technology-based
innovations"
• Changing or diversifying from current
market segment also termed as "market-
based innovations"
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Breakthrough innovations
• Electric toothbrush
• Anti-dandruff shampoo
• Hybrid Cars
• Color printers
• Single-serve 'pod' coffee
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Radical Innovation
"Shun the incremental and look for a
quantum leap"
- Jack Welch
• Explores new technology
• High uncertainty
• Focuses on products, processes or services
with unprecedented performance features
• Creates a dramatic change that transforms
existing markets or industries...
• ...or creates new ones
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Disruptive Innovation
Clayton Christensen, "The Innovator's Dilemma"
A company that does everything by the book — listening
to customers, managing by facts, being disciplined
about costs and quality, and so forth — can get
blindsided by an innovation that rapidly takes away its
markets, because it was doing everything right.
The innovations that cause this “why bad things happen
to good companies” dilemma are disruptive
innovations.
The signature story of disruption reads as follows: an
upstart low-end competitor displaces a much larger
incumbent in a market, with the incumbent either
retreating upmarket to higher margin/lower volume
products or dying out altogether.
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Disruptive Innovation
• Music
o Records->Cassettes->CDs->downloads
• Low Cost Airlines
• Android Phones (HTC)
• Digital photography (Kodak)
• News (print vs. online)
• Universities (MOOC)
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Starbucks Innovation
Via Blonde Roast
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Nestle Nespresso
Global ‘Capsule’ Sales in 2013:
$10.8 billion
Nestle share: almost 33% ($3.5 billion)
“Nestlé Loses a Clash Over Single-Serve Coffee”
Case brought in French court by Douwe Egberts /
Senseo regarding unfair competitive practices
France accounts for 25% of Nespresso sales
($0.9 billion)
French courts ruled that any measures that
Nestle takes to limit other manufacturers from
producing coffee for its machines is not legal.
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The Diffusion S-Curve
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Patents Exaggerated?
"...there's a lot more than intellectual property
protection that drives innovation and
influences market share. For the twenty
years that these patents were in effect,
GMCC was not just leaning on its patent
exclusivity; it was cultivating its brand,
honing its supply chain efficiencies, and
generally maintaining its dominance due to
having the first mover advantage.[...]
particularly...perfecting the manufacturing
of these cups." - Ali Sternburg
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Keurig Case – K-cup
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Green Mountain
Coffee Roasters
1997 Revenue - $43 million
2014 Revenue - $4,710 million
========================
5-year Annual Revenue Growth
53%
========================
1997 Net Income - $1.5 million
2014 Net Income - $596 million
¿What happened?
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Keurig Vue (end of 2013)
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Keurig Rivo (2015)
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Keurig – Oops!
Launch of Keurig 2.0
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Philips vs. all others Mission:
What is Philip’s mission?
What is Keurig’s mission?
What is Nestle’s mission?
Pricing:
Keurig / cup?
Nestle / cup?
Senseo / cup?
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PHILIPS VS. KEURIG
Fiv
e F
orc
es M
od
el
Complementors
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Philips is making choices
Choose to leave the USA
Choose to sell Senseo to Douwe Egberts
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Jacobs (formerly Kraft) +
Douwe Egberts (formerly Sara Lee)
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Strategic decisions….Appeals to Europeans
• Small size of coffee cup (espresso based)
• Limited variety (no flavors or brands)
• Well-known and respected brand
But…. The American Single-Serve market is too big to
ignore:
• US Coffee Market Total: $19 billion (20% of global)
• (Keurig - $4.7 billion)
Single serve pods account for 41.2% of dollar sales of ground
coffee in the US
By Elaine WATSON, 23-Apr-2014
More than four out of every 10 dollars spent on ground coffee in
the US is now spent on single-serve pods such as K-Cups,
according to the latest Nielsen data.
http://www.foodnavigator-usa.com/Markets/Single-serve-pods-account-for-41.2-of-dollar-sales-of-ground-coffee-in-the-US
http://www.fool.com/investing/general/2014/02/16/keurig-20-may-warm-things-up-for-green-mountain.aspx
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Strategic decisions….
Appeals to Americans:
• Large Size of coffee cup (non-espresso based)
• Variety of Flavors / Types / Brands
• Unknown brand
Keurig’s Dominance of the US Market*:
• 16% of homes have a Keurig Single-
Serve Brewer (SSB) **
• A goal of 25% by 2020
• Keurig SSB Market Share: 72%
• Nespresso SSB Market Share: 3%
* http://www.marketplace.org/topics/business/single-serve-coffeemaker-market-heats (April 9, 2014)
** http://seekingalpha.com/article/2856736-in-mature-markets-innovation-is-key-for-keurig-green-
mountain?auth_param=12tsg6:1ach61a:4ed18851c700ef9e378be851cacb35f3&uprof=14&dr=1 (January 28, 2015)
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Nestle Nespresso
Global ‘Capsule’ Sales in 2013:
$10.8 billion
Nestle share: almost 33% ($3.5 billion)
“Nestlé Loses a Clash Over Single-Serve Coffee”
Case brought in French court by Douwe Egberts /
Senseo regarding unfair competitive practices
France accounts for 25% of Nespresso sales
($0.9 billion)
French courts ruled that any measures that Nestle
takes to limit other manufacturers from producing
coffee for its machines is not legal.
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Founded 2006
Has sold and given away 20 million shoes
Least expensive shoe is $54
Total sales over $1 billion
August 2014 –
Bain Capital acquires 50% at a valuation of
$625 million
“The ethical shoe company is valued at $625m
despite selling a relatively dull product and giving
half its stock away”
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Expansion of concept
2011 – Sunglasses ($98 - $189)
(for every pair purchased, Toms
will help give sight to a person in
need)
2014 – Coffee ($13 for 350 grams)
(each bag of coffee beans = clean
water for a week /
each cup of coffee = clean water
for a day)