I N T E R N A T I O N A L IMD046(M 543)v. 15.12.2003INNOVATION AND RENOVATION: THESTORY ResearchAssociateJoyce Millerprepareathiscase unaerthesupervisionof ProfessorKamranKashanias abasisforclassaiscussion ratherthantoillustrateeither effective or ineffective hanaling of a business situation. Certain names, facts ana financial aata have been aisguisea. ThiscasewontheMarketing Awarainthe23European CaseWritingCompetition organi:eabytheEuropean FounaationforManagement Development (efma). Thebusinesshastwo--andonlythesetwo--basicIunctions:marketing andinnovation.Marketingandinnovationproduceresults;alltherest are costs. Peter Drucker Management. Tasks, Responsibilities, Practices To just keep pace in this industry, you need to change at least as Iast as consumerexpectations.That`srenovation.Tomaintainaleadership position, you also need to leapIrog, to move Iaster and go beyond what consumers will tell you. That`s innovation. Peter Brabeck-Letmathe, CEO, Nestl S.A. IndividualisationisadrivingIorceintoday`smarkets--ineverything Irom the telephone to beer to tea to personal computers. The Nespresso SystemisaninnovativeconceptthatoIIersconsumersindividual portionsoIIreshly-groundcoIIeeinarangeoItastesthatresultinan exceptional cup oI espresso every time. We`re convinced oI the power oI the idea and the technology behind it, and we`re aiming to grow this business eightIold to SFr 1 billion in the next decade. Willem Pronk, CEO, Nestl CoIIee Specialties Copyright2000byIMD-InternationalInstituteforManagement Development,Lausanne,Swit:erlana.Nottobeuseaorreproauceawithout written permission airectly from IMD. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 2 -IMD-5-0543 Introduction NespressowastheleadingbrandinportioncoIIee,asmallbutIast-growing category in the world coIIee market. The product consisted oI high quality coIIee packedinaluminiumcapsulesIorexclusiveuseinspeciallydesignedmachines. DevelopedatNestl,theNespressoSystem,asthecapsule-machinecombination wascalled,oIIeredtheconsumerareIinedqualityandindividualisedcupoI espressocoIIeewithspeedandconvenienceatthepushoIabutton.Inthe stagnating global market Ior coIIee, Nespresso had created a new growth segment. This case is about the history oI Nespresso`s development and the challenges Ior itsIuture.PartIdescribesNestl`sstrategiesIorgrowththroughinnovationand renovation,andtracesthehistoryoINespressoIromitsuncertainbeginningsto becoming one oI the Iastest growing businesses in the company. This section also describesthemanagement`spracticesandviewsonpromotingaclimateIor innovation.PartIIexplainsthechallengesIacingmanagementasthecompany aimed to grow the Nespresso business towards the SFr 1 billion level.1 PAR1 I Aestl and the History of Aespresso Establishedin1867inVevey,Switzerland,by1999,Nestlwastheworld`s leadingIoodcompany,employedover225,000people,hadsalesoImorethan SFr 70billion,andoperated495Iactoriesinover80countries.PeterBrabeck, whotookoverthereinsinJune1997Iromlong-timeCEOHelmutMaucher, believed that continuous innovation and renovation would be the keys to meeting thecompany`sambitious4growthtargetinanindustrywherethenormwas halIthatlevel.WhilechangingdemographicsandliIestylesinindustrialised countries,whereNestlgeneratedthebulkoIitssales,meantopportunitiesIor new business development, these markets were also increasingly characterised by discriminatingconsumers,powerIulretailers,growthoIprivatelabels,and pressure on prices and margins.InseekingnewgrowthmarketsIoritsexistingproducts,Nestlhadrecently launched its strategic brand NescaI, the pure soluble coIIee that the company had inventedin1938,intothemuchwiderareaoIready-to-drinkcoIIeebeverages. Similarly,Nesquick,thecompany`sglobalbrandIorchocolatepowder,was extended into new liquid Iorms. In addition, a completely new product concept, a re-mineralisedtablewatermarketedunderthebrandPureLiIe,wassuccessIully tested in a number oI markets in Asia and Latin America. For Brabeck, these were examplesoInewconceptsthatcombinedtechnologicalandmarketinnovation. Brabeck commented: ThesuccessoIleadingbrandsisproportionaltotheircapacityIorinnovationand renovation. Innovation is taking something into the next category or inventing a whole new category. Renovation is keeping the product in the same category and improving it. These concepts are not only technical and production-related, but must be applied throughout our business:IromorganisationalstructurestoIinance,administration,marketing, communication, etc. To make a quantum jump into another direction, we need to look Ior new opportunities and we must be prepared when they arrive. 1 In 1999, US$ 1.00 SFr 1.50(one Swiss franc 100 centimes). For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 3 -IMD-5-0543 InBrabeck`sviews,certainmanagementqualitieswereprerequisitestoattaining thecompany`sgrowthtargets.Thesequalitieswereusedascriteriabysenior management in appointing individuals to important positions (refer to Exhibit 1). Although Brabeck was patient, he was not complacent about his objective oI long-term growth through innovation and renovation. He remarked: Nestl has the lowest risk proIile that a company can have. While we get pressure Irom the IinancialanalyststodothingsdiIIerently,themarketisIinallybeginningtounderstand. We`renotinterestedincompromisinglong-termshareholdervalueIorshort-termshare price maximisation. We have a long-term vision Ior growth.IngeneratinggrowththroughhighlydiIIerentiatednewproducts,Brabeck wonderedwhatpoliciesandpracticesmightbeneededatNestltopromotea climate Ior change and innovation. In the same context, he wondered what lessons the Swiss giant could glean Irom its long learning curve in bringing the Nespresso System to market. Aespresso System: Product Innovation Against the Odds TheNespressoSystemconsistedoIindividually-portionedaluminiumcapsules containing5gramsoIroastandground(R&G)coIIeemadeIorexclusiveusein specially-designedcoIIeemachines(refertoExhibit2).Hermeticallysealedto preserve the Ireshness oI the coIIee Ior six months aIter production, the Nespresso capsulesalsohadtheadvantageoIbeingcleanandeasy-to-usecomparedto traditional, hand-measured espresso coIIee. Each capsule corresponded to a single cupoIcoIIeeandworkedonlyinNespressomachines.Consumerscouldchoose Irom eight available coIIee varieties (refer to Exhibit 3). TheoutwardsimplicityoItheNespressotechnologymaskeditscomplexity.The coIIee-makingprocessinvolvedthreestages:pre-wetting(wherewaterwas sprayedonthecoIIeetoexpandit),aeration(whereairwaspassedthroughthe coIIeetocreatesmallirrigationchannels),andextraction(wherewaterIlowed throughthecoIIeeatoptimalpressureandheat).Theextensivelyresearched Nespressomachinecontainedachrome-platedcapsuleholderequippedwitha built-in opening and Iiltering system, a microchip-monitored pump that delivered varyinglevelsoIpressuredependingonthecoIIeeblend,andahighprecision thermoblocksystemtocontinuouslyheatwaterintheidealrangeoI86oto91o centigrade.Thisextractionprocesswasseentobehighlyinnovative, incorporatingyearsoIresearchandlearningthatwouldbediIIicultIora competitortoreplicatewithoutpatentinIringement.TheNespressoconcept currently outperIormed all competitors in quality and convenience. NestlheldthepatentsIortheNespressomachinesbutlicensedtheirproduction tomanuIacturerswhodistributedandsoldthemthroughselectedhousehold applianceretailers.ThemanuIacturersalsooIIeredaIter-salesservice.Nestldid notmakeanymoneyonthesaleoIthemachines.ItwasonlythesaleoIthe capsulesthatdeterminedtheproIitabilityoIthebusiness.Industryanalysts estimated that proIit margins on the capsules could be as high as 50.Withitsdistinctivebrand,luxuryimage,andIocusonthesmallportionoIthe espressocoIIeesegment,NespressorepresentedamajordepartureIrommost NestllinesoIbusinessreputedIorlarge-scaleproductionandmassmarketing. OutsiderssometimesremarkedthatitwasacompanyIor'liIers--managerswho stayed with the company career-long. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 4 -IMD-5-0543 The R&D PushThetechnologybehindtheNespressoSystemactuallyoriginatedinGeneva`s Battelle research institute. Nestl acquired the rights to commercialise the idea in 1974.Atthetime,NestldominatedtheinstantcoIIeemarket,whichaccounted Ior 30 oI coIIee consumption world-wide. Instant coIIee generated over 80 oI thecompany`scoIIeesalesandcommandedlargepromotionalbudgetsand managerial attention. On the other hand, Nestl had no signiIicant presence in the muchlargerR&Gsegment,whichrepresentedthe70oItotalworld consumption.Furthermore,whilethetotalcoIIeemarketwasstagnant,even declining in some countries, management realised that a growth opportunity in the 'gourmetsegmentoIthecoIIeemarketwasrapidlydevelopingintheUSand elsewhere. In the same way that Grand Cru appellations distinguished top quality wineIromeverydaywine,'gourmetreIerredtopremium-endcoIIee(e.g., espresso)wherespecialcareandattentionweredevotedtothecoIIeevariety, roasting process, and brewing phase.TheaimoItheNespressoproductdevelopmentwastocombineNestle`sR&D strengthwithitsdeepknowledgeoIthecoIIeebusinesstobringahighquality coIIeeproducttothemarket.ButanumberoItechnicalproblemshadtobe overcomeIirst.Forexample,theprojectedproductioncostsweretoohigh,the IreshnessoItheenclosedcoIIeecouldnotbemaintained,andthequalityoI espresso2wasinconsistentIromcuptocup.Nevertheless,aIewpeoplein Nestl`sR&DorganisationIirmlybelievedintheprojectandpusheditIorward. They improved both the coIIee capsule and an espresso machine later produced by Turmix, a Swiss manuIacturer. Other problems were resolved in time.TheprojectgainedearlysupportIromNestl`sIoodservicedivision,whichsaw Nespresso as an entry into the restaurant market, thereby positioning Nestl more strongly in this segment. But in 1982, Iollowing a market test with eight automatic machines in Swiss restaurants, that strategy was abandoned in Iavour oI the oIIice coIIee sector. Sobal--a Swiss company that distributed appliances and was already presentinoIIicecoIIee--wasapproachedtodistributetheNespressoSystem(the machine and the capsules) in oIIices and other institutions. Nespresso:A ~Satellite Outside of Nestl`s Main Coffee Business ToIurtherdevelop,produce,andmarkettheNespressoSystem,aseparate companywascreatedinJune1986asa100-ownedNestlaIIiliate,located acrossthestreetIromthecompany`sheadquarters.Itwasthoughtthatthenew unit, later called Nestl CoIIee Specialties (NCS), would be able to move Iaster in seizingthemarketopportunityinthenewly-created,individual-portioncoIIee category.ExclusivelyresponsibleIorpromotingproductsundertheNespresso brandname,thecompanycoulddevelopitsowncommercial,distribution,and personnel policies separate Irom Nestl. A special production line was opened to make the coIIee capsules at the NescaI plant in Orbe, Switzerland.CamilloPagano,atthetimeseniorexecutivevicepresidentinchargeoIseveral world-wide strategic product divisions and business units, commented: 2A'gooa`cupofespressowasaistinguisheabyitsfinetasteanaits'crema,`thevisually aistinctivecreamyfoamonthesurface,whichcoffeeconnoisseursconsiaereaanessential part of the espresso experience. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 5 -IMD-5-0543 IsawthiscontraptioninOrbethatsomebodysaidwasgoingtobeIantastic.Idiscovered that the R&D team had developed this system without even really talking to the marketing side.Thereisnodoubtthattechnicaldevelopmentcanbringinnovation.Butinternally, therewasalotoIscepticismaboutthepossibilitytocommercialiseNespresso.The business was physically moved out oI Nestl so that it could establish credibility and so that it didn`t have to Iight against all the company`s rules.PeoplethoughtIwasa'nut'tospendsomuchtimeonthissmallthingandtosupportthe idea. Nespresso is so diIIerent Irom what the company does in its day-to-day business. I Ielt that developing this business would take time and patience. You need champions at the top Ioranewidea.Youneedtogiveanideasupportagainstcriticism.Anyinnovation immediately hits resistance in an organisation. Small satellites like this can help people gain insightintohowabusinesscouldbedevelopeddiIIerently.TheseoIIshootsprovidean opportunity to train and test people. II they make a mistake there, it`s not so costly.TheNespressoSystemwasIirstlaunchedinItaly,theworld`slargestespresso-drinkingnationandinSwitzerland,Nestl`shomemarket.Japanwasalsolater includedasitwasoneoItheworld`sIastestgrowingcoIIeemarkets.Sales initiallyIocusedontheoIIice-coIIeesector.TheNespressomachineswere designedinternallybyNestlandaSwissdesigncompanyandmanuIactured underlicensebyTurmixIorEuropeanmarkets.Sobalpurchasedthemachines Irom Turmix and the coIIee capsules Irom NCS and then sold the two together as theNespressoSystem.Additionally,severalcompaniesthatdistributedvending machines in the oIIice sector added Nespresso machines to their product line-up. It was thought that, compared with households, the oIIice segment would be less sensitivetotherelativelyhighunitpriceoIthemachinewhich,atthetime, retailed close to SFr 800. A box oI 10 coIIee capsules sold to oIIices at SFr 4. Worrying Signals from the Marketplace BytheendoI1987onlyhalIoIthemachinesthathadbeenmanuIacturedwere actually sold. The company was behind target on sales Ior both the machines and thecapsules.Andwithoutthemachines,IurthercoIIeecapsuleswouldnotsell. Therewerealsootherworryingsigns.MachinedeIectswereabsorbingalarge partoIthemaintenanceandservicebudgets,whichNestlwascoveringintotal. Slow sales in non-traditional espresso markets like Japan were also deepening the losses.ArgumentsweremadetobringinsomeoneIromtheoutsidewithnew ideastosaveNespressoIromanearlydeath.In1988,YannickLang,aIormer Philip Morris executive, was recruited to the venture. Rethinking the Strategy of Aespresso Swiss-bornandUS-educated,33-yearoldLangcameintotheNespressoteam withareputationIorIlairandcreativityandasolidcommercialandmarketing track record, having catapulted the Marlboro Classics clothing line Irom SFr 20 to SFr 100 million within a Iew years. Pagano recounted: The Nespresso business was at the point where we needed an entrepreneur to take it Iurther. WeneededtoIindsomebodywhowouldn`treactlikeaNestlmanager.Peopleinour organisation are good, but at the time, everyone was asking, How could we sell this thing insupermarkets?`Nestldoesn`tbringpeopleinIromtheoutsideasacommonpractice, butweneededsomeonewhounderstoodwhatitmeanttosellapremiumsystem--somethingbetweenLouisVuittonIashionaccessoriesandMaggibouillon.Thisneedsa specialmentality. What reallyconvincedmewasLang`s background,comingIromPhilip Morriswheregoingintotheclothingbusinesswasalsoastabinthedark;itwasnotthe usual thing to do. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 6 -IMD-5-0543 RupertGasser,executivevicepresidentinchargeoITechnical,Production, Environment, and R&D, to whom Lang subsequently reported, remarked: Langwaspurposelyhiredexternallyratherthaninternally.Hewasambitiousandstrong-headed.HehadastrongdriveIorrecognition.Hewantedtodosomethingoutstanding. Lang had personality; he was a Iorce. And importantly, he did not carry all the trappings oI the company history. He was outside oI Nestl`s main coIIee structure. A Strategic Shift to the Household Market TheideaoIspearheadingthedevelopmentoINespresso--asmalloperationina separatecompanywithaseparate product--was very appealingIor Lang.Butthe team oI eight people he inherited were acting in a 'skunkworks, and the business was losing money in the oIIice segment with Ilat sales. Lang soon concluded that the prospects Ior the Nespresso System in the oIIice sector were limited, but that therewaspotential,albeitunproven,inthehouseholdmarket.Langthoughtthat households headed by well-educated, aIIluent 35- to 45-year-old men and women, whoenjoyeddrinkingrestaurant-qualityespressoathome,couldconstitutea proIitablesegmentIortheNespressoSystem.Markettrendsevidentinthelate 1980s supported this idea. CaIs and bistros were opening up across Europe, and the success oI gourmet and specialty coIIee chains in the US (e.g., Starbucks, The CoIIeeBeanery,andCaribou)hadledespressotobeperceivedasatrendy, sociallyelitedrink.ThevastmajorityoIespressodrinkerstendedtobecity dwellerswithdiscerningtastesinIood.ThegrowthinpopularityoIItalian liIestyle, cuisine, and Iashion had also Iuelled interest in this method oI extracting what was said to be the best aromas and positive components oI coIIee.3 Langbelievedthattobuildlong-termbusinesswithsuchdiscerningconsumers, Nespresso had to be in the household market. Lang presented his revised strategy toNestl`sgeneralmanagementinearly1989.Despitesubstantialinternal scepticismabouttheprospectsIortheNespressoSystem,hereceivedthe'green light to launch the household strategy, but only in Switzerland. The rationale was thatitwasahighriskstrategythatstillneededtobeproven,andthatasingle marketcouldbeshutdownmoreeasilythanmultiplemarkets.IILangcould deliver on his target to triple the sales volume within a year, the top management agreed, then the business could continue. Verylittlemarketresearchonthehouseholdmarketexistedatthetime.What researchhadbeendoneindicatedlowpotentialIortheNespressoconcept.Some datashowedthattheperceivedconsumervalueoIthecoIIeecapsulecouldnot exceed the low Iigure oI 25 centimes (as opposed to the target consumer price oI 40centimes).AmarkettestwithIiveupscalehouseholdappliancestoresin Switzerland was similarly disappointing. The objective was to sell 100 Nespresso machinesthroughintensiveretailmerchandisinganddemonstration.Theactual sales, however, were less than halI oI the target. To avoid being shut down, Lang interpretedthemarkettestresultshepresentedtocorporatemanagementrather liberally, i.e., his presentation showed a more Iavourable picture than the evidence suggested.Although most people in Nestl considered the commercialisation oI Nespresso to beimpossibleatthetime,theNespressoteamwascompletelyconvincedoIits potential, despite the grim market research Iindings. Pointing to the Iailure oI the IirstmarkettestsIorIaxmachinesandmobilephones,theirattitudewasthat 3 Source.'Coffee International File, 1998 to 2002.` Market Tracking International. 216-17. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 7 -IMD-5-0543 consumerresearchtendstoreIlectpastexperience--whichdoesnotnecessarily lead to innovation. The continuing conviction oI Lang and his team was based on intuition and a strong personal belieI in the Nespresso System.Positioning Nespresso at the TopLang`snewstrategyinvolvedpositioningNespressoawayIromthemore utilitarianoIIicecoIIeeandtargetingconsumersatthetopoIthehousehold market.NespressomachineswouldbeproducedinSwitzerlandunderexclusive agreement with a leading manuIacturer oI espresso machines. Nespresso machines weresoldthroughselectedhouseholdapplianceretailers,departmentstores, electricaloutlets,andkitchenwarestores.Nespressomachinesretailedinthe range oI SFr 350 to SFr 900. Retailers earned a 25 to 35 margin on the sale oI the machines. Machine makers earned a 30 to 35 margin, typical Ior a product oIthistype.Again,NestldidnotproIitIromthesaleoIthemachines.To accompanyhisglobalambitions,Langsubsequentlydeveloped'machine partnershipswithseveralinternationalproducersanddistributorsoIhousehold appliances like Matsushita, Krups, Philips, Alessi, Jura, and Magimix.Duringthisperiod,LangandhisteamintroducedmodiIicationstothedesignoI the coIIee capsules that cut material costs while making them recyclable.Gasser commented on the new strategy: There were not many people in the company who believed in Nespresso, but Lang did. He was totally convinced oI the opportunity. Nespresso was purposely run at arm`s length and not built into Nestl`s main coIIee structure. Our CEO challenged Lang a lot. He Iound the challenge motivating; he liked it.Individually-portioned coIIee was an idea mainly pushed Iorward by R&D. There was a lot oI internal criticism at the time, but the project got support Irom Nestl`s CEO, who dared todosomethingdiIIerent.Whensomethingisnew,itwillalwaysmeetwithresistance. There will always be a lot oI ifs and buts. Most people didn`t think Nespresso would be a revolutionary idea. There was a concern that it would distract us Irom our core business in instant coIIee. It was seen as competition to instant coIIee.Debut of the Nespresso Club TheshiIttothehouseholdmarketsoonledtoare-evaluationoIthestrategyIor distribution.TheideaoIchannellingcapsulesalesthroughsupermarketswas explored but rejected as Lang Ielt that this would simply transIer the proIitability oIthebusinessawayIromNespresso.AnearlierattempttosellthecoIIee capsules in US Iood outlets had actually Iailed because the consumer base had not beenbroadenoughandretailershadbeenleItwithaconsiderablestockoIstale coIIeecapsules.ExperienceshowedthatitcouldtakeuptothreemonthsIorthe Nespressocapsulestoarriveonstoreshelves,cuttinginhalIthetimeremaining until the best-beIore expiry date. With such a short shelI-liIe, quality could not be assured.AstherewerestillsomenaggingproblemswiththereliabilityoItheNespresso machines,andquickserviceturnaroundwasconsideredcritical,Langseizedon the idea oI using a direct marketing channel to stay close to the consumer. Turning atechnicalconstraintintoanelegantmarketingsolution,Langconceivedand launched the Nespresso Club, which, in addition to handling service calls, oIIered consumers: For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 8 -IMD-5-0543 Arouna-the-clockoraer-taking:Consumerscouldtelephoneanationalcall centre24hoursaday,7daysaweek. Orders Ior Nespresso capsules could be placed by toll-Iree telephone, Iax, mail, and eventually over the Internet. Prompt aelivery of fresh coffee: Within two business days. Personaliseaaavice:TrainedcoIIeespecialistswereonhandtoadvise consumersaboutthediIIerentIlavoursandprovidetechnicalassistanceon themachine.ClubmemberscouldalsobeneIitIromrecipesuggestions, Nespresso accessories, special oIIers, and get inIormation about new coIIee blends. Langalsoputinplacesomestringentoperatingrules.Forexample,inthe NespressoClubs,telephoneshadtobeansweredwithinthreerings,andhe insistedthatstaIIandmanagersdressinawaythatreIlectedwellontheluxury image oI the system they were selling. The Club was an immediate success. Purchasers oI the Nespresso machines, sold throughhouseholdappliancestores,automaticallybecamemembersoIthe NespressoClub.TheClubconceptwastheIirstdirectmarketingexperiment within the larger Nestl organisation. In 1990 there were 2,700 Club members in Switzerland, France, Japan, and the US. In that year, the stretch sales targets set a yearearlierhadbeensurpassed.NespressoClubswerelaterestablishedin Germany and the Benelux (1992) and in Spain, Austria, and the UK (1996). The NespressoSystemwasalsoavailablethroughagentsintheMiddleEast,south-east Asia, and Australia.Spreading the Word AspartoIthestrategytoIurtherinternationaliseandpositiontheNespresso Systemasapremiumproduct,thecompanysoughtthepatronageoIBritish Airways,CathayPaciIic,andSwissair,amongstothers,whichbeganserving NespressocoIIeeonboardtheirlong-haulIirstclassIlights.Toprestaurants, mostly in France and Belgium, were also solicited. In countries where Nespresso Clubs existed, heavy investments were made in training sales clerks in retail stores where Nespresso machines were sold. Experience showed that sales clerks needed togiveahighleveloIattentiontoconsumersinordertoselltheNespresso machines.ThetrainingandIinancialincentiveswereseenaskeystosupporting and motivating retail clerks to demonstrate and sell the machines.Despitethestep-by-stepinternationalgrowth,nomajoradvertisingorpublic relations campaigns were undertaken. The Nespresso Club was the chieI means oI communication.Thecompanyreliedmainlyonword-oI-mouthonthepartoIits extremely loyal consumer base to promote the Nespresso System. AlIred Yoakim, who had been part oI the original Nespresso product development team, said: Advertising is good Ior the image. It can reassure consumers and communicate an image oI quality.ButI`mnotconvinceditwillmakeaconsumerchangetoespressoandbuythe Nespresso System. For this, we can only rely on word-oI-mouth. Rupert Gasser concurred: We don`t need mass media or television. We`re targeting the crme ae la crme. We need simpler means, unconventional ways oI reaching new consumers. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 9 -IMD-5-0543 Achieving Growth and Profits UnderLang`sleadership,NCSachievedbreakevenin1995andsubsequently becameoneoItheIastestgrowingbusinessunitsintheNestlorganisation.By 1997NespressoClubmembersnumbered220,000(reIlectinga30average yearly increase), the company`s ristretto variety had won special recognition Irom theInternationalInstituteoICoIIeeTasters,andthecompanyhadinstalleda second production line Ior the capsules and was manuIacturing them around-the-clock.Lang was known as a tough manager by the team oI 'young tigers he had built, someoIwhomhehadhiredawayIromIirst-classconsumergoodscompanies. Lang was also known as a strong-willed person who did not give up easily. People recalled that every win gave him a boost. He resisted all eIIorts to apply methods thatmightleadtorisk-avoidanceasheIelttheNespressobusinesshadtogoon takingrisks.However,somewhoworkedcloselywithLangIoundhisstrong-headedness a barrier. In the words oI one oI his associates: He was passionate about his own ideas but not those oI his colleagues. He was impatient, wanting to make things happen in no time. He was a tough boss, a diIIicult person to work with and manage. Creating a Climate for Innovation DiIIerentopinionswereexpressedregardingwhattheexperienceoIbringingthe NespressoSystemtomarketmeantIorthelargerNestlorganisation.Lang believed that he had created an environment where his team could take intelligent risks and where everyone could be an innovator. Lang Ielt that iI he had stuck to an'army-likestructure,NespressowouldhaveIailed,ashebelievedthat anythingmilitary-likewouldstampoutinnovation.Forhim,havinganinIantry thatmarcheswhenit`stoldtomarchandassumesthatthechainoIcommand knowsbest,wouldnotleadtoinnovation.Langwasknowntoacceptstructure where it served his purpose and 'helped people to do a good job. He rejected it in instances where 'it stopped people Irom innovating.Lang went to great lengths to keep the Nespresso concept alive, sometimes doing thingsattheedgesoItheNestlorganisation.Healsoestablishedprivileged contacts with high level members oI the top management. Former executive vice presidentPagano,whobeIorehisretirementattheendoI1991heldprivate discussions with Lang, remarked: Nespresso was developed as a totally innovative system. Lang craIted a strategic image that wasconsistentlycarriedthrough.Atonetime,hewassoconvincedoItheconcept`s potential that he even tried to buy Nespresso.PaganoIeltthatanindividual`spersonalitywastremendouslyimportantwith respect to innovation: It`snotnecessarilytheinventoroIanideawhohasthecapabilitytotakeitIorward.This needs courage, leadership, temperament, and charisma. An organisation also needs to build in the right to make mistakes. This message is not always going down through the bunker` oIourmiddleranks.It`sstuckornotbeingproperlyexplained.Nestlneedspeoplewho can take an idea, believe in it, and bring it to Iruition against the odds. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 10 -IMD-5-0543 Rupert Gasser, who had overseen the entire Nespresso development and believed ingivingbroadresponsibilitytorisk-takers,the'youngstersashecalledthem, oIIered his insights into the innovation process at Nestl: Our problem is not a lack oI good ideas. We have too many oI them. The key is to be able toextractanidea,carryitIorwardintheorganisation,andtransIormitontothe supermarket shelI. The real barrier to innovation is perceived risk. People ask themselves, 'WhyshouldIengageinaprocesswithanuncertainoutcome?'Peoplerejectrisk-taking becausetheyIeelitcanendangertheircurrentstatus,theirjobs.AtNestl,weneedto create a risk-Iriendly environment where people don`t Ieel unduly exposed. We must accept that people make errors. But Iailure due to trying something new shouldn`t be a career risk. Sometimes you have to shelter the real innovators, the risk takers. Atthesametime,Gasserbelievedthatinnovatorsneededtobeoccasionally challenged to make sure they had not ignored important details. He said: SometimespeoplewhopushIorinnovativeideasIorgetsomebasicthings.Butbybeing challenged in a dialectic process, they improve their solutions. It`s a positive process. GasserrecognisedthatinnovationinalargecorporationlikeNestlwasa complex process: Growththroughacquiringbrandsandcompaniesisrelativelylowrisk.Buildingnew business is diIIerent; it`s more complex and carries higher risks. In our company, we must be able to get R&D, manuIacturing, and the local Nestl market companies to work in close proximity.Thisneedstobeaconstructiveprocess;otherwise,innovationwillnotbe successIul.He agreed that innovation and renovation were both necessary Ior Nestl4:Tostayviableinthelong-term,weneedbothinnovationandrenovation.Innovationisa quantumleapthatisnotnecessarilyonlyrelatedtoproducts.Itcanalsoberelatedto manuIacturingprocessimprovementortradechannels.Renovation,ontheotherhand,is more incremental; it allows you to sharpen your claws every day. AtNestl,identiIyinghighpotentialindividualswhowouldIosterchangeand innovation was a senior management responsibility. Brabeck personally Iollowed thecareersoIseveralindividualswiththeaimoIpickingtherightpeopleIor tough assignments and helping them to grow in their jobs. He believed that Nestl neededmanagerstokeepthecorebusinessesrunning,whowouldassureorder anddisciplineandprovidesecurityandlongevity.Buthealsosawtheneedto provide space Ior what he called 'change drivers. But this change was complex. Brabeck explained: You can`t impose change Irom the top. You can only create an environment that stimulates change.Manymanagersinlargeinstitutionshavebeentrainedtokeepthingsrunningas theyhavebeen.TheyhavelearnedtocomplywithanenormousnumberoIdetailed procedures and systems. They were taught by experience that they are better oII Iollowing theexpectedandacceptedtracksoIroutineratherthanventuringoutintothenewand unexpected.We need to create a climate where there is a certain Ireedom to Iail, and where those people who are promoted have made decisions and carried them out, even iI they were not always 4 Innovation and renovation reIerred to radical and incremental changes respectively. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 11 -IMD-5-0543 100successIul.Wedon`twanttoadvancethecareersoIthosewhohavenevermadea mistake because they`ve never done anything except apply the rules. We have to identiIy, Ioster, and mentor people who have proven that they`re willing to stick their neck out, who made a mistake, learned Irom the mistake, and are willing to continue taking risks.On the other hand, Brabeck observed: IIyou`reonlybeinginnovativeandcreative,butnotproducingreliableproducts,you`ll soon be out oI business. For Nestl, the quality and security oI our products is Iundamental. ForAlIredYoakim,theheadoItheNespressodevelopmentteamIromitsearly days, there were lessons on innovation Irom Nespresso`s experience:By staying in an ivory tower, you can improve an existing product, but you can`t innovate. To innovate, you need the Ireedom to make your own decisions, to not Iollow the old rules. MarketingpeoplecaninnovatebecausetheyareIreeoItechnicalrestrictions.Technical people can innovate because they are Iree oI commercial considerations. What we have to do is put the two together. There`s still room to innovate in the espresso market. The only limit to innovation is our imagination. Aespresso Under Aew Leadership Lang`s tenure at NCS was not without controversy. He was thought by some to be a maverick, an 'out-oI-the box manager who IorceIully pushed Ior his ideas, and who Iound being challenged by his superiors motivating. Gasser called him a real Iorce behind the Nespresso phenomenon and a 'rare bird. Lang was subsequently nominatedtoaselectlistoImanagerswhomNestlconsideredas'corporate assets.Latein1997anopportunitycamealongIorLangtomovetotheUSto workonNestl`slargebutunder-perIormingice-creambusiness.The appointment was considered by everyone, including Lang himselI, a timely career move.However,lessthansixmonthslater,Langannouncedthathewasleaving Nestl, having been headhunted by another Iood company. In the eyes oI Nestl`s top management, NCS had now reached a critical stage in itsevolutionneedingtoshiItgearsIorsustainedIuturegrowth.InthewordsoI Gasser: ThechallengeIoranysmall,innovativeorganisationistomakesuchatransIormation. Nespressoneededstructure,betteroperationaleIIiciency,controloIcosts,quality,and inventory,inadditiontomodernpersonnelpolicies.Asthecompanygrew,theseissues became increasingly important.WillemPronk,44,acareer-longNestlemanager,wasappointedtospearhead the transIormation at NCS. He was considered to be a very structured manager and a good marketer. ForNestl`sCEO,Nespresso`sdevelopmentreIlectedsolidtechnicalknow-how combinedwiththemarketingsparkoIanindividualembeddedinasupporting organisation. Brabeck commented: For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 12 -IMD-5-0543 There was a long learning curve to transIorm the Nespresso innovation into an acceptable, perceivableend-productIortheconsumer.WithPronk,we`veagreedtotakethebusiness IromtheSFr150millionwhereitstandsnowtoSFr1billionwithinthenext10years. Then it becomes an interesting business Ior a company the size oI Nestl.Atthestart,werealisedthatwehadtoseparatethisbusinesssothatitcoulddevelopits ownliIe.Atacertainpoint,adiIIerentmanagementstylewasneeded.Noteveryoneis good Ior all phases oI a business. As a group, Nestl has the resources to cover the whole spectrum. In a crisis moment, we may bring someone in Irom the outside, but normally we trytoavoidthis.We`renotlookingIorsaviours.WelookIorpeoplewhowillbecome long-term collaborators at the service oI the company. PAR1 II 1owards the One-Billion 1arget Pronk Takes the HelmIn his own words, Willem Pronk was 'born in Nestl. Over the course oI his 20-odd year career at Nestl, Pronk had developed a reputation Ior being an innovator and a risk-taker. While managing NescaI in the Netherlands, Ior example, he had introducedanew'cafealacarte`concepttorejuvenatethebrand`sstagnating businessinthatmarket.DespitethescepticismoIhissuperiors,hehadallocated anentiremarketingbudgettopromotethenewconcept:aselectionoIdiIIerent NescaIblendsinastylishwoodenbox.Theconceptworkedwithspectacular results, pushing sales up by more than 200. This and other moves brought Pronk totheattentionoIheadquarters.HequicklybegantoclimbtheNestlranks. ReIlecting on his early days in Nestl Netherlands, Pronk said: As Peter Brabeck says, 'II we had continued to do what we`d always done, we would have continued to have what we always had--an unsatisIactory perIormance.' I pushed Ior trying something new. II it didn`t work, the worst case scenario was that I would be Iired. But so what? People ask me iI it`s Irustrating to work in a multinational like Nestl. My answer is: No, I`m probably more Irustrating to other managers than they are to me. In a big company like Nestl, you have access to resources and all the sources oI innovation. You can either acceptthesystemorchallengeit.Therearenohard-and-Iastrules.I`dratheraskIor Iorgiveness than permission. Soon aIter arriving at NCS, Pronk began working to enhance the consumer service sideoIthebusiness.TheNespressoClubdatabasewassegmentedaccordingto consumptionhabitsandthelengthoImembership,andtargetedcommunications werelaunched.FiIteentotwentypercentoINespressocapsuleorderscurrently came Irom small oIIices. 'New members (less than a year) were tracked closely asitwasIeltthattheirlong-termconsumptionhabitswereIormedbyusage patternsestablishedintheIirstIewmonths.ANespressoClubstaIImember personallyIollowedupon'heavycapsuleusers(morethan100capsulesper month)whodidnotplaceanorderbythecomputer-anticipateddate,toensure thattheirmachinewasIunctioning,takeorders,andanswerquestions.When machinesneededservice,theClubarrangedIorIreehomepick-upandreturnoI therepairedappliance.ThemachinemanuIacturerdidtherepair.ANespresso machine was loaned Iree to members during the period. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 13 -IMD-5-0543 Pronkbelievedthattheaboverenovations,amongothers,wereneededtocreate customerintimacy,buildlong-termloyalty,andputNespressoontheroadto becomingameaningIulconceptin thecompetitiveworldoIcoIIee.(Refertothe Appendix for backgrouna information on the worla coffee market.) Issues for Growth Withits10existingNespressoClubsin1999,NCSwasreceiving7,000orders world-wideIorcoIIeecapsuleseachday,andhadthecapacitytoproduce350 millioncapsulesannually(refertoExhibit4).Closeto100,000Nespresso machineshadbeensoldinthepastyearalone,bringingtheinstalledbaseupto about 350,000. New consumers were also coming on board (refer to Exhibit 5).While the Nespresso concept had created and dominated an entirely new gourmet coIIee category--the portion-coIIee market--several issues still had to be resolved iI NCS was to accelerate its growth. Pronk was very concerned that NCS had, to date, only achieved an average awareness rate oI less than 5 in its international markets,andpenetratedlessthan1oIhouseholds.Someassertedthatthese ratiosweresigniIicantlyhigheramongupscalehouseholds,thecurrenttarget segmentIorNespresso.Nevertheless,theIactremainedthatveryIewcoIIee consumers actually knew about the Nespresso System.Pronk saw the individualised portion concept on which the Nespresso System was based as a vital means Ior rejuvenating the mature coIIee market. But little market research had been undertaken to date. Pronk remarked: The quality oI the Iuture depends on the quality oI the plans you put into action today, and theinIormation on whichtheyarebased. That`s whymarket research iskey.Forme,this isn`t about getting reports; it`s about being present during the interviewing and being totally immersedwiththeconsumer.Weneedtoknowthreethings:Whydopeoplebuyour product? Why do they buy a competing brand? And why don`t they buy any product in this category?Thenwecanlookatthethreewaystogrowthebusiness:sellmoretocurrent consumers, sell to consumers oI the competition, and sell to non-category users. Looking to the Iuture, Pronk was concerned about Iive issues: how to attract new consumers,whethertointroducealower-costsystem,howtoserveawider market,whethertodiversiIyintonon-coIIeeproducts,andhowtopre-empt competitors. 1) Attracting New Consumers Mostpeopledrankespresso'away-Irom-homeinrestaurants,hotels,bars,and IromvendingmachinesinoIIicesandpublicareas.Homeconsumptionwas limited, in part, because oI the perceived high price oI espresso-making machines. InItaly,espressowasinexpensiveat1,000lire(SFr0.75)acupandwidely availableattheneighbourhoodbar.Only1in5Italianhouseholdsconsumed espresso at home. In France, the world`s second largest espresso-drinking nation, 66 oI adults regularly drank espresso but only 12 drank espresso at home. In northerncountries,liketheUKandGermany,espresso-drinkingwasinits inIancy,butgrowing.MostUShouseholdsstillusedelectricdripcoIIeemakers. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 14 -IMD-5-0543 Lessthan1oIUSconsumershad anespressocoIIeemachineathome.5Pronk reIlected: TheNespressoSystemguaranteeshighqualityandoIIersconsumersindividualchoice, consistency, and convenience. These are the values oI the Iuture. One type oI coIIee Ior all isanold-Iashionedconcept.ButdespitethesuccessoItheNespressoClubandour comprehensive knowledge oI consumer preIerences as a result oI it, our awareness remains low in priority markets. Word-oI-mouth is a slow process. We have to Iind other means oI making the Nespresso concept known.One idea that had been implemented a Iew years ago was to give Iree machines and coIIee capsules to opinion leaders, like politicians, journalists, etc., in key markets. This was thought to be less expensive than a media campaign. Untilnow,littleadvertisinghadbeenusedtoraiseconsumerawarenessabout Nespresso. Old timers like AlIred Yoakim were strongly against the idea. He said: Advertising won`t do us any good. It`s just a waste oI money. CamilloPaganowasalsocautiousaboutthenewgrowthstrategiesbeing discussed. He said: I`mworriedaboutthemassmarketingmentalitythatisenteringthepicture.Inthis business, you can`t talk about household penetration and market awareness. TopromotetheNespressoconceptandsalesoIthemachines,NCScontinuedto investsigniIicantresources(upwardsoISFr200permachinesold)intraining retailersanddoingmerchandisingandin-storepromotions.Recentstudieshad shownthatretaildemonstrationaccountedIor40oInewconvertstothe Nespresso System. The remaining 60 oI new customers came through word-oI-mouth.Inspring1998,2,100Nespressomachineshadactuallybeengivenaway IreetoBelgianretailersaspartoIanincentiveprogrammeinitiatedbyGeneral ElectricBelgium.Uponseeingthat55oIthesenewmachineownersnever calledtheClubtoordercoIIeecapsulesandayearlater,only26oIthetarget group were active customers, Pronk noted:TheexperienceconIirmedwhatwealreadyknew:thatpeopletowhomtheNespresso System is targeted must have a desire to drink espresso coIIee. II we promote the machines toomuch,we`llsucceedingettingpeopletobuythemachines,butnotthecomplete concept. 2) Going Down Market? Bymostmeasures,theNespressoSystemwasmoreexpensivethanalternative methodsoImakingcoIIee.ComparedwiththecostoItraditionalIiltercoIIee machines,theNespressomachinewasIivetimesmoreexpensive.Comparedto regularespressocoIIee,NespressocoIIeewasthreetimesmorecostly.Yoakim said: 5 Source. Wheeler, Michael. 'Coffeeto 2000. A Market Untamea.` Economist Intelligence Unit, 1995. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 15 -IMD-5-0543 Likeallespressomachines,theNespressoSystemistargetedtoanaIIluentgroupoI consumers,thetop10oIhouseholds.IItheycanaIIordtheespressomachine,theycan surelyaIIordthecoIIeecapsules.We`renotsellingamachineandthenacapsule.We`re selling a result: a cup oI espresso. And I want the consumers to get the best result in their cups. PronkwasadamantlyagainstoIIeringalower-pricedsystemandtheideaoI marketingthesystemunderadiIIerentbrandname.Hebelievedtherewasstill enormous growth potential in Nespresso`s current strategy. 3) Distribution to Serve a Wider Market In markets like Switzerland, where a critical mass oI consumers had been created, retailershadapproachedNCSaboutthepossibilityoIsellingthehigh-margin capsules.GoingthroughtraditionalIoodretailerswouldbeadepartureIromthe past, a move Pronk was not entirely convinced oI: II we give away 25 margins to retailers, there won`t be much leIt here to show Ior proIits. Besides,theClubgivesusaIantasticknowledgeoIconsumersthatwouldbelostiIwe wentthroughretailers.Ontheotherhand,iIwecontinuetosellexclusivelythroughthe Nespresso Clubs, non-users won`t see the product. Another idea was to showcase the Nespresso concept through a chain oI exclusive boutiquesestablishedinhighstreetlocationsinmajorEuropeancities.Itwas estimated that each boutique would involve a one-time investment oI SFr 250,000. 4) Diversification into Non-Coffee Products New uses Ior the Nespresso System based on the 'portion concept had yet to be explored.Forinstance,individually-portionedsoupsorteascouldbroadenusage amongcurrentconsumersandattractnewconsumers.TheideaoInon-coIIee productswasnotverypopular,however.PronkandGasserwerebothconcerned that such a product extension would dilute the original concept.5) Blocking Competitors NCScurrentlyhelda90shareworld-wideinthehouseholdsegmentoIthe portioncoIIeemarket,withSwitzerland,France,andtheBeneluxbeingitsmost importantmarkets.Theremaining10sharemainlybelongedtoBelgium`s Malongowithits1,2,3SpressosystemandItaly`sIllycaIIe,whichhadyearly salesoIUS$130million.HavingpioneeredtheESEStandard(EasyServing Espresso),IllycaIIehadbegunsupplying'L`Espressoportionsanditsown espressomachinetohotels,restaurants,andbars.Thecompanydominatedthis sector in Italy but was less established in the mass consumer market. Since 1994, Lavazza, a Iamily-run Italian company with US$ 700 million in annual turnover, hadmarketedIourindividualportions,containing6.5gramsoIgroundespresso coIIee, custom-made to Iit its own espresso machines. Close to 80 oI Lavazza`s sales were in the oIIice coIIee channel.6 These companies had entered the portion coIIeemarketwithlower-qualityproductsandespresso-makingmachines retailing in the range oI SFr 300 to SFr 350.AlthoughthetechnicalcomplexityoItheNespressoSystemandrelatedpatents weremajorbarriers,theNCSteamwasconvincedthatinternationalIood 6Source.'Espresso,WheretheLeaaersStana.`Tea&CoIIeeTradeJournal,November1998, ana 'Coffee International File 1998 to 2002.` Market Tracking International. 219-22. For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 16 -IMD-5-0543 companieswiththeirlargeresourcescouldchallengeNespresso`sdominanceby extendingtheirlong-establishedR&GbrandsintotheportioncoIIeesegment.In Iact, NCS had learned that Sara Lee had recently registered a patent Ior a portion coIIee concept with a diIIerent extraction process, which was as yet commercially unproven.In1997KraItJacobsSuchardhadexpandeditsCarteNoirelinein France to include 'Espresso Dosettes Filtres. Additional developments were also underwaythatcateredtothesingle-personhouseholdsinNCS`stargetgroupIor espresso drinkers.Pronkexpectedaseriousentrybyoneormoreplayersintothehigh-quality, portion-coIIee market where Nespresso was currently positioned. Nevertheless, he believedthatNCShadseveraladvantages:advancedtechnicalknowledge,the Club, and a critical mass oI consumers in some oI its international markets. It was estimated that it would take a newcomer Iour years to establish a Ioothold in any national market, and a minimum oI 15,000 to 20,000 installed machines to break even. Conclusion Morethan13yearsaIterNespresso`sdebut,NCShadseeminglyreacheda satisIactory perIormance but still Iell Iar short oI Nestl`s high ambition oI SFr 1 billionsales.AtatimewhenNestlwasseekingnewgrowthopportunities,a couple oI questions preoccupied those who were Iamiliar with Nespresso: 1)What lessons could be learned about innovation or renovation Irom the Nespresso story? 2)What must NCS do now to reach its ambitious growth targets? For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 17 -IMD-5-0543 Exhibit 1 Qualities and Characteristics of a Nestl Manager ThehighertheleveloIthepositionandtheresponsibilityoIaNestl manager, the more he/she should be selected on the basis oI the Iollowing criteria(inadditiontoproIessionaleducation,skills,andpractical experience): Courage, solid nerves and composure; capacity to handle stress. Ability to learn, open-mindedness and perceptiveness. Ability to communicate, to motivate and to develop people. Ability to create a climate oI innovation. Thinking in context. Credibility: in other words 'practise what you preach. Willingness to accept change and ability to manage change. International experience and understanding oI other cultures. Inaddition:broadinterests,agoodgeneraleducation,responsibleattitude and behaviour and sound health. Source:The Basic Nestl Management and Leadership Principles For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 18 -IMD-5-0543 Exhibit 2 The Nespresso System Source:Company inIormationFor exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 19 -IMD-5-0543 Exhibit 3 Available Varieties of Nespresso Coffee Capsules Source:Promotional material provided to Nespresso Club members Exhibit 4 Growth of Nestl Coffee Specialties Turnover, Employees, and Nespresso Club Members 1989-1999 Source:'Nespresso Prodige. Bilan, April 1998, and company inIormation RistrettoComposed oI pure Arabica beans Irom Latin America Ior its Iinesse and a touch oIRobusta Ior its intensity, it is savoured very short in a demitasse Iilled halIway.Arpeggio The Grand Crus oI Central America give strength and Iullness to its aroma while a touch oI Brazilian Santos harmoniously balances its Ilavour.RomaA blend oI Latin American Arabica Ior delicacy, this gives the strong, intense espressooI Italian "baristas" with a thick, rich cream.It is the ideal base Ior making a cappuccino. CapriccioA satisIyingly smooth espresso made Irom early Latin American Arabicas Ior a rich and straightIorward taste, Brazilian Santos Ior Iull and consistent body, and a touch oI Central AIrican Robusta Ior intensity. Top with whipped cream Ior a true Jiennois.Livanto Made Irom the best Arabicas oI South and Central America, this espresso is rich, intense,and smooth. Savoured in a demitasse or cappuccino cup, with or without milk, it is the morning espresso par excellence.Cosi A pure Arabica with all the Iullness and Ilavour oI the Grand Crus oI Central America, the density oI mountain grown coIIees Irom Eastern AIrica, and a touch oI mildness Irom Brazilian Santos. With milk, this espresso can be savoured as a con latte.JollutoA delicate yet Iull-bodied pure Arabica espresso. The mellow richness oI early Latin American beans gives this blend a distinct, elegant, subtle bouquet. Characterised by its mildness, it isideal any time oI the day.DecaffeinatoNaturally decaIIeinated, it has a delicate, balanced, and enticing Ilavour. ItsIreshness and intensity come Irom the great early Arabicas oI Central America reinIorced by a touch oI Central AIrican Robusta.0S0,000100,0001S0,000200,0002S0,000300,0003S0,000+00,000+S0,00019891990199119921993199419951996199719981999 (projected)1XPEHU RI 1HVSUHVVR &OXE PHPEHUV020+060801001201+01601802007XUQRYHU LQ 6)U PLOOLRQV

QXPEHU RI HPSOR\HHVClub membersTurnoverEmployeesFor exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 20 -IMD-5-0543 Exhibit 5 Development of NCS Capsule Sales 1990-1999 020+060801001201+01601801990 1991 1992 1993 1994 1995 1996 1997 1998 1999Year1996 = 100,QGH[ Source: Company inIormation For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 21 -IMD-5-0543 APPENDIX The World Coffee Market: Mature and Highly Competitive Globally,thecoIIeemarketwasinamaturestage.Growthhadbeenachievedonlythrough increased retail prices and growing consumer demand Ior high quality, gourmet coIIee (refer to1able1).EuropeancountriesledtheworldinpercapitacoIIeeconsumption,with Scandinavian nations heading the list (refer to 1able 2). The coIIee market was split between R&GcoIIeeandinstantcoIIee,andsecondarilybetweenthe'away-Irom-homeand'in-homesectors(referto1ables3ana4).World-wide,R&GaccountedIoralmost70oI coIIee sales or about US$198 billion at average consumer retail price, whereas instant coIIee accounted Ior 30 oI sales or US$85 billion (refer to 1able 5). The coIIee industry was dominated by Iood multinationals renowned Ior their strong brands, aggressivepricing,andhighmarketingexpenditures.Nestlwasactuallytheworld`slargest coIIeecompanywitha23shareoIthetotalmarket(referto1able).Thecompany dominated the instant coIIee segment with a 56 share Irom its Ilagship brand, NescaI, and its numerous product varieties, but the company was ranked Iourth in the R&G segment with a7share.PhilipMorris(KraItJacobsSuchard,MaxwellHouse),whoseIoodbusiness generated over US$27 billion, was the second largest coIIee company with a 14 share oI the total market. The company was the leader in the R&G segment with a 13 share and second ininstantcoIIee.SaraLee(DouweEgberts),withanannualturnoveroIUS$20billion,was the third largest coIIee company with a 7 share oI the total market. It was the second largest player in the R&G segment. Procter & Gamble (Folgers CoIIee), with an annual turnover oI US$37billion,wastheIourthlargestcoIIeecompanywitha6shareoIthetotalcoIIee market. In recent years, proIit margins Ior coIIee producers had been narrowing as a result oI growing competition in the R&G segment. This trend had encouraged companies to enter the smaller, but higher-margin, high growth gourmet coIIee segment. In 1999, this segment was estimated to be worth US$10 billion world-wide and was growing at a rate oI 20. Table 1 Total World-Wide Coffee Consumption in billions of cups: 1980-1996 (all coIIee, all channels) Source: Company inIormation0100200300+00S006007008001980 1990 1993 199+ 199S 1996billions of standard cups of coffeeEast EuropeDevelopingCountriesTea-drinkingcountriesNorth AmericaContinentalEuropeFor exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 22 -IMD-5-0543 Table 2 The Leading World Markets for Coffee Consumptionper capita consumption in total cups, 1996 Source: Company inIormation Table 3 Market Breakdown by Country R&G vs Instant Coffee 1995 Source: International CoIIee Organisation FinIund149Sweden 113ZNetherIunds 110Norwuy 1094Denmurk 104SwitzerIund90ZAustriu 71Costu Picu777Sermuny7Frunce 74eIgium/Luembourg 7190 20 +0 60 80 100FinlandSwedenDenmarkNorwayAustriaNetherlandsGermanySwitzerlandFranceUSCanadaSpain!talyPortugalJapanUKGreeceAustraliaR8G !nstantFor exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 23 -IMD-5-0543 Table 4 ~Away-from-Home vs ~In-Home R&G and Instant Coffee(world-wide consumption in billions oI cups: 1996) Source: Company inIormation Table 5 Partial Structure of the Global Coffee Market, 1999 ALL COFFEE = 100%100 million 60kg bags of green coffee= 700 billion cups of coffee @ average consumer retail price = US$284 billion ROAST & GROUND( > 69% )US$198 billionINSTANT( 30% )US$85 billionCOFFEE DRINKS ( < 1%)US$1 billionFILTER ( 95% )US$188 billion GOURMET / ESPRESSO US$10 billionRegular Filter CoffeeFlavored Coffee(vanilla, nut, etc.)Cappuccino and othersDecaffeinatedAway-from-Home(hotel/restaurant/bar and vending machines)

n-Home

Pre-preparedportions andindividual doses

RegularEspressoCappuccinoandothersDecaffeinatedced coffeeTraditionalhand-measuredportions Source: International CoIIee Organisation and company inIormationR8G"!n-Home "+8!nst ant"!n-Home "26!nst ant "A w ay-from-Home " +R8G "A w ay-from- Home "22For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.I N T E R N A T I O N A LL AUS ANNE S WI T Z E RL AND- 24 -IMD-5-0543 Table 6 World`s Leading Coffee Roasters Market Share by Volume, 1995 Nest le (Ne scaf e ,Hills Brot he rs)23Lav azza2Philip Norris (Kraf tJ a cobs Suchard)1+Sara Lee(Douwe Egbert s)7P8G (Folgers C of f ee)6Ot hers+8 Source: International CoIIee Organisation, Encyclopaedia oI Global Industries, (Food, Drink, and Tobacco Products), and company inIormation For exclusive use INCAE Business School, 2015This document is authorized for use only in Gerencia de Mercadeo II - MBA CAMP 2016 NI-SP by Professor Luciano Ciravegna, INCAE Business School from July 2015 to January 2016.