Nestle and the Nespresso System Analysis

Introduction

Nestle company was established in 1867 by Henri Nestle in Vevey, Switzerland and is currently one of the top nutrition, health, and wellness company in the world. By 1999, it had secured a place as the world’s leading Food Company with over 225,000 employees across the globe (Miller, 2000. 2). It is the largest Switzerland’s industrial company and also the largest world’s food company according to Malik et al (3). The company has had robust performance recording sales worth SFr 70 billion in 1999 which soured to CHF 109.9 billion in 2008 with a net profit of CHF 18.0 billion (At a glance 1). Nestle has consistently dominated in the sale of coffee, milk products, confectionery, and dehydrated cooking aids accounting for 60% of the company sales and more than 75% of the operating profits.

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On taking over the realms as the chief executive of the company Peter Brabeck embarked on ambitious strategy of hitting a 4% growth target through continuous innovation and renovation. This was informed by the realization that their traditional market was rapidly changing in terms of consumer discrimination, emergence of powerful retailers and powerful labels and growing pressure in prices and profit margins (Miller, 2000. 2). In its earlier attempts to expand the market for its already existing products, the company had launched Nescafe into the ready to drink coffee beverage segment while introducing liquid form of Nesquick. In addition, Brand Pure Life re-mineralized table water was launched with great success in the Asian and Latin American market.

Innovation and renovation

Renovation is the ability to adapt to the changing tastes and preferences of the consumers. On the other hand, innovation is the ability to introduce new products into the market. Innovation has been used interchangeably with invention to mean creation of something that never existed before (Yossifov 11). Through the Nespresso system, the company proved that faced with stagnation, a producer can explore new growth market areas through innovations (Stark 1). This opened a new customer service concept by integrating technology and scientific research to improve service delivery through speed and convenience in service. This helped Nestle to open a new market for its products. In addition to the above, innovations enabled the firms to make up for the costs incurred in putting up the investments (Keane 4). For innovations and renovations to take place, an enabling environment must be in place. This is achieved through possession of a management team with the desired qualities to push the achievement of the company growth targets. Brabeck listed a number of desired qualities to look for when recruiting managers so as to facilitate the achievement of the goals.

In order to develop new products comprehensive and extensive research must be carried out. This helps the innovator to weigh the costs and the benefits of introducing such innovations into the market. Feasibility studies must also be carried out to measure the viability of the product in the market. Before launching the Nespresso machine, Nestle researched on it extensively, which enabled the company to leap calculable benefits from the innovations. Long years of learning and research produced the great innovation that according to the company would be difficult to copy without infringement of their patent. His helped them to beat all their competitors in terms of quality and convenience of service.

Innovations are important assets to any company or an individual innovator. To protect your innovations from infringement by copy cats, it is important to patent them. This must however be done in a way not to inhibit mass production of the product for you to leap substantial benefits. This the company achieved by holding the patent to the machine while giving licenses to manufacturers who were allowed to produce the product and distribute it through a range of selected stores. These manufacturers besides production and distribution were licensed to provide after sales service to customers. The sale of the capsules produced by the machine was expected to push the profit margins by up to 50%.

Innovations also help a company to maximize its competitive strength by fully exploiting its available resources to come up with new products. For example, Nespresso was an outcome of the company’s research and development strength in combination with long experience and deep knowledge of production processes of food products. As a result of these internal advantages, the company was able to resolve the bottlenecks in the production of the Nespresso machine thereby making it a great success.

As long as an idea is supported by research, one should not be cowed down by skepticism about it. Such ideas require patience for them to work out. You need to mobilize support around what you believe is winning idea and never let it die down for lack of information about it. In addition, you should be ready to guard it against criticism because people tend to be resistant to new ideas and change. For example, the management at Nestle was skeptical about commercializing the Nespresso system. However, with determination and undying resilience from the innovators, it was launched successfully in the market. Other weaknesses in design were quickly resolved with time.

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To help, with distribution of the Nespresso machine, the new CEO, Yannick Lang entered into partnership with household appliance distributors. This was accompanied with yet another renovation of the machine through the modification of the coffee capsule. This renovation helped cut the material cost in manufacture and made the capsule machine recyclable. This enhanced the element of cost management in production of the machines thus helping to cut the cost of production.

One of the most innovative strategy and that which saw the radical turn around of Nespresso was the launch of Nespresso Club by Lang. This was a direct marketing strategy that was directed at the household market. Its main emphasis was personalized customer service. This was achieved through around the clock service, prompt delivery of fresh coffee and personalized advice to customers. The revolutionary idea brought out a new perspective in innovations aimed at improvement of service delivery. The strategy was complimented by strict operational practice especially in customer care aimed at improving among other things response time and the business image. The idea was an immediate hit surpassing its targets by 1990. This necessitated its large scale roll out to Germany, Spain, Austria, and UK. This is a depiction of what an ingenious innovative strategy can achieve when nurtured by determined minds.

Proper training is very important in personalized services. Lang undertook heavy investment into the training program geared towards producing competent sales force. This is because the trade demanded for keen attention to consumers’ needs and inquiries for you to sell a unit of the Nespresso machines. This training was combined with financial incentives which motivated them to work harder and deliver larger volumes. In addition, it encouraged the sales clerks to properly demonstrate and sell the product to the customers.

Word to mouth advertisement seems a good avenue for product promotion in the hospitality industry especially when dealing with extremely customers. The networks created with the customers are especially an effective way of reaching out to new customers. The assurance of customer and transfer of image quality are easily achieved through this means. Satisfied customers easily introduce their friends to the company’s products. This referral system works better than any other system in the market segment besides being simple and cost effective.

An innovator friendly environment needs to be created and nurtured within a company to allow all members to give their input into innovation. Instilling self initiative within the firm and self drive among the employees gives an ample room for innovative ideas. This acts as a strong incentive for innovations in business. Risk taking is also an asset towards innovations in business. One should not be afraid of making mistakes as it is through these mistakes that one learns. In addition, the company rules should be flexible enough to allow employees room for innovation besides high degree of tolerance in mistakes while trying to innovate or implement new ideas. This virtue of risk taking is what has driven the innovativeness of Lang to success.

Growth strategies for NCS

Lang catapulted Nespresso from its poor performing status to become one of the fastest growing divisions in Nestle. By 1995, the division had broken even while it continued to register a tremendous growth of 30% in membership annually. This translates to about 220,000 Nespresso club members annually. The company even earned an international recognition through an award by the International Institute of Coffee Tasters. Despite the company emerging as a run away success, there are still greater prospects for the growth by the firm using a combination of other tactics. These include among others:

Sound management of the company operations

Continuous sound management will be pivotal in taking the company to the next level in performance. Lang’s able management has proven that strong determination is a prerequisite to running an innovation oriented business. As the company believes in internal recruitment for constituency, it ought to be grooming more leaders from within who will drive the next phase of the firms operation. It has been noted that new management translates into injection of fresh ideas for the company just as Lang did. On leaving, his position was occupied by William Pronk who came with a new range of revolutionary ideas that helped the firm realize robust growth and overcome stagnation in the next phase. Change in management gives room for injection of forward thinking experienced managers into the company operations. These have the potential of bringing in innovations and a positive shift in the business environment (Applegate 1).

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Continuous renovations

Continuous renovations of the existing product range will enable the company to maximize its benefits accruing from its many innovations. This will ensure the maximum potential of the available products are tapped to increase their productivity thereby reducing the prospect of stagnation in sales. In doing so, the economies of scale from the existing strategies and innovations will be fully exploited to the benefit of the company. For example, on taking over from Lang, William Pronk embarked on a string of renovations to revamp the existing products. This included the restructuring of the customer service to make it more responsive to the consumers. On this line, the company needs to consider re-branding of its existing products in order to boost their performance in the market. This will give them a fresh taste and bolder outlook among the consumers.

Strengthening of the research and development department

Research and development is vital for the growth of any company. It helps a company remain ahead of the park through innovations and renovations and also constant review of the quality of production. For NCS to remain competitive, they will have to strengthen this department for it to remain as efficient as it has always been and even better placed in churning out competitive products into the market. Adequate resources will have to be allocated to the department to facilitate faster realization of this dream. The company’s advanced technical advancement in production will only be nurtured through the strengthening of the research and development debarments. To do this NCS will have to dedicate adequate resources in terms of financial capital, human resources, and equipment.

Product diversification

Besides producing coffee capsules, the company could consider other means of exploiting the full capacity of the machine by diversifying their product proposition in the market. For example the company could try production of teas, soups and other drinks using it hence helping the company secure additional revenue. This should however be approached with care to avoid diverting the company production from its core business which would damage the brand image of the company leading to loss of revenue.

Marketing promotions

Despite its great success, the Nespresso system’s brand awareness still remained low in the international market. The level of awareness by 1999 in the international market stood at less than 5% while the level of penetration was less than 1% of the households. The word of mouth advertisement gimmick would not work to achieve this objective. As a result the company ought to embark on aggressive media campaign targeting the international market. Since the system is targeted at the household market, social networking which is gaining prominence especially with the youthful age will definitely be a good idea to consider in marketing. The social networking media has a wider penetration potential since it has a global coverage and is largely inexpensive to run. One more advantage is that it will allow NCS to interact with its customers. For example, opening a Nespresso members club on such site as face book will ease the company’s burden of carrying out market research on the penetration of its products despite improving its customer service experience among customers. Customer’s enquiries and concerns will be expeditiously addressed as a result. This ought to be combined with the broadcast media in order to achieve the targeted goal.

Conclusion

Although it fell short of its target, NCS has faired impressively in terms of its performance. Its high level of innovativeness and renovations has ensured the company stays far ahead of the competition. The company fully understands that innovation is not a choice and to compete in the global arena they need to embark on continuous innovations and renovations. As a result of the aggressive innovations the company has managed to expand its market share, improve customer care experience, produce new products and create new market for its products. The strong management and able leadership who possessed a strong belief in the company’s products helped to catapult the company’s products to high levels.

Works Cited

Applegate, Lynda. “Jumpstarting Innovation: Using Disruption to Your Advantage”. Harvard business school. 2007.

Keane, Jodie. Working paper 293: A new Approach to global value chain Analysis. Overseas Development Institute, 2008. Web.

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Malik, Muhammad Hayat; Ali, Amir; Rana, Adnan; Ilyas, Muhammad; & Khan Sami Ullah. “Nestle”. Scribid. 2009. Web.

Miller, Joyce. “Innovation and Renovation: The Nespresso story,” Lausanne International Institute for management Development, 2000. Web.

Nestle. “At a glance: Introduction”. Nestle.com. Web.

Stark, John. Innovation management: Typical reasons for innovating, John Stark. 2000.

Wheeler, Michael. “Coffee to 2000: A market untamed”. Economist Intelligence Unit, 1995.

Yossifov, Vladimir. ”Wealth creation through invention, innovation and creativity, Geneva”. World Intellectual Property Organization, 2002.

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