A Dynamic View of Strategy

In late 1988, the newly appointed CEO of the Nestlé subsidiary, Nespresso, was trying to decide how to rejuvenate his subsidiary’s financial fortunes. Jean-Paul Gaillard had just taken over a subsidiary that, despite selling one of Nestlé’s most innovative new products, was facing serious financial problems.

The Nespresso product was a system that allowed the consumer to produce a fresh cup of espresso coffee at home. Though simple in appearance and use, it took Nestlé more than ten years to develop it. The system consisted of two parts: a coffee capsule and a machine. The coffee capsule was hermetically sealed in aluminum and contained five grams of ground roast coffee. The machine consisted of a handle, a water container, a pump, and an electrical heating system. These four parts were cast into a body to form the machine.

The use of the Nespresso system was straightforward. The coffee capsule was placed in the handle, which was then inserted into the machine. The act of inserting the handle into the machine pierced the coffee capsule at the top. At the press of a button, pressurized hot water passed through the capsule. The result was a creamy, foamy, high-quality cup of espresso.

The new product was introduced in 1986. Nestlé’s original strategy was to set up a joint venture with a Swiss-based distributor, called Sobal, to sell the new product. This joint venture (named Sobal-Nespresso) would purchase the machines from another Swiss company (called Turmix) and the coffee capsules from Nestlé, after which it would distribute and sell everything as a system — one product, one price. Offices and restaurants were targeted as the customers and a separate unit called Nespresso S.A. was set up within Nestlé to support the joint venture and to service and maintain the machines.

By 1988, it was clear that the new product was not living up to its promise. Sales were well below budget, and costs were escalating due to quality problems. Nestlé executives were considering halting the operation when Jean-Paul Gaillard was chosen to decide whether and how to strategically reposition the subsidiary.

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References

1. The “who-what-how” framework was introduced in:

D. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, New Jersey: Prentice-Hall, 1980), chapter 2.

2. In nearly all cases and contrary to traditional wisdom that emphasizes exploiting economies of scale in such offices, a Jones office is a one-person operation. Each Jones broker has extraordinary autonomy in managing his or her office, and every branch is a profit center. A satellite communications network that broadcasts “home-grown” TV programming ties brokers to the home office.

3. P. Weever, “Growing Call of Telephone Banks,” Sunday Telegraph (London), 22 December 1996, p. 2; and

A. Bailey, “Telephone Banking – It’s for You: The Service Has Scope for Great Popularity,” Financial Times, 3 April 1996, p. 18.

4. See C. Markides, “Strategic Innovation,” Sloan Management Review, volume 38, Spring 1997, pp. 9–23; and

C. Markides, “Strategic Innovation in Established Companies,” Sloan Management Review, volume 39, Spring 1998, pp. 31–42.

5. This same point is also discussed in: M. Tushman and C. O’Reilly, “The Ambidextrous Organization: Managing Evolutionary and Revolutionary Change,” California Management Review, volume 38, Summer 1996, pp. 8–30; and

R. Burgelman and A. Grove, “Strategic Dissonance,” California Management Review, volume 38, Winter 1996, pp. 8–28.

6. Tushman and O’Reilly (1996), p. 11.

7. J.M. Utterback, Mastering the Dynamics of Innovation (Boston: Harvard Business School Press, 1994), p. 216.

8. A. Cooper and C. Smith, “How Established Firms Respond to Threatening Technologies,” Academy of Management Executive, volume 16, May 1992, pp. 92–120;

R. Foster: Innovation: The Attacker’s Advantage (New York: Summit Books, 1986), chapter 6, pp. 139–164;

A. Cooper and D. Schendel, “Strategic Responses to Technological Threats,” Business Horizons, volume 19, February 1976, pp. 61–69; and

Utterback (1994), chapter 9, pp. 189–213.

9. W. Taylor, “The Business of Innovation: An Interview with Paul Cook,” Harvard Business Review, March–April 1990, pp. 96–106.

10. A.S. Grove, “Navigating Strategic Inflection Points,” Business Strategy Review, volume 8, number 3, 1997, pp. 11–18.

11. Utterback (1994), p. 220.

12. Grove (1997), p. 17.