Technique 2.80 Location of New Identity

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For established organisations, the task is how to implement and manage new models while maintaining existing ones. These established organisations need to become ambidextrous as it is difficult with the new models challenging or even competing with established and successful business models. The new model may require a different organisational culture/structure or need to target new customers that were formerly ignored.

For established organisations. there are several options to handle a new initiative, eg
i) separation/
autonomy, ie form a separate identity
ii) in-house, ie keep within the established organisation as either
integration, ie stays within the current organisational structure, or
standalone, ie a separate business unit within the current organisation
(NB success will depend upon how the choice is implemented and if it can be done in a phased sequence like e-Schwab, the Internet arm of Charles Schwab, the US retail security broker. It initially set up e-Schwab as a separate unit but later integrated it back into the main business with great success. Similarly, was the Internet branch of Tesco, the giant UK retailer, which made a successful transition from integrated business to stand alone unit)

To help make this decision, ie integration or stand-alone, on how to handle new and traditional business models, you need to consider the following variables, eg
- severity of conflict, eg in-house will have a greater potential for conflict than separation
- strategic similarity
, in-house will have a greater strategic similarity than separation
Linked with these 2 are
- risks (what is the potential that the new model will negatively impact the established one in terms of brand image, earnings, legal liabilities, etc)
- synergies (need to find ways to exploit these)
Some examples of ambidextrous firms
- ING (during the GFC this group was in financial trouble owing to its INGdirect unit, which provides online and telephone retail ranking services in overseas markets. ING treated ING direct as a marketing initiative rather than a new, separate business unit. In hindsight, it would be have been preferable for it to remain as a separate identity rather than be absorbed in-house)
- SMH (the Swiss watch manufacturer chose the integration route for a new Swatch business model in the 1980s - see details below)
- Nestle (Swiss food maker chose the separation route for bringing Nespresso to the marketplace, ie high-end; while providing for the mid-tier market with Dolce Gusto and mass market with Nescafe), ie

    - high-end restaurants
- quality espresso at home
- coffee manufacturers Key Stakeholders (excluding customers) Value Propositions Customer Segments
- up-market/wealthier households
- office market
- manufacturing
- marketing
- distribution & channels

- competitors
- technology
- lifestyle changes
- impact on other in-house brands
Cost Structure


(Nestle's Nespresso)

Customer Relationships
- Nespresso boutiques
- call Centre
- retail (machines only)
- mail order

- Nespresso club
  Key Activities Key Resources Revenue Streams - main revenue: capsules
- others: machines & accessories
- marketing
- production
- logistics
  - distribution channels
- patents on system
- brand
- production plants


Nespresso story

It is part of Nestlé (one of the world's largest food companies) with sales exceeding US$ 100 b. in 2008. Nespresso, which sells around US 2 b annually, is a single serve, premium coffee for home consumption.

In 1976, Eric Favre (a researcher working for Nestlé) filed the first patent on Nespresso, ie a dedicated espresso machine and pod system that could conveniently produce restaurant-quality espresso. At this stage Nestlé dominated the instant coffee market with its Nescafe brand; however, it was weak in the roast and ground coffee segments. Initial focus was on the restaurant market which was not successful.

In 1986 NespressoSA, a wholly-owned subsidiary was formed to start marketing in support of another Nestle's joint-venture with a copy machine manufacture already active in the office segment. This was not successful but was kept alive because of its large remaining inventory of high-value coffee machines.

In 1988 a new CEO of Nespresso overhauled the company's business model by
i) shifting its focus from offices to a high income households
ii) started selling coffee capsules directly by mail

This was a new approach for Nestlé as its traditional focus had been on targeting mass markets through retail outlets.

This was further extended by selling online and building retail stores at premier upmarket locations.

These changes were successful, with Nespresso annual growth in sales exceeding 35% for a decade.

NB Nespresso's aim is barista coffee at the push of a button but contain about 5g of coffee which is around 50% of what barista say should be in a single espresso shot.  Thus it is a very expensive way to drink coffee.  Nespresso argues that it delivers quality and consistency, ie you get the same results every time, 24/7, whereas in a coffee shop it is a gamble on whether the machine is set up properly, the coffee maker knows what he is doing, etc.

Nespresso is a global beverage company that sells a convenient, disposable product.  It is a carefully crafted luxury image that is powerful and probable.  It dominates the global coffee capsule industry.

It is interesting to note how Nestlé used two different approaches, ie traditional coffee business focused on instant coffee sold to consumers indirectly through mass-market retailers, while Nespresso used direct sales to affluent consumers. Each approach requires completely different logistics, resources and activities. Luckily there was no risk of direct cannibalisation; at the same time there were few potential synergies between the 2 businesses. The main area of conflict between the 2 arose from the considerable time and resources drained from Nestlé's coffee business until Nespresso became profitable.

In 2004 Nestlé introduced a new system which was complementary to the espresso-only Nespresso devices: could now offer cappuccinos and lattes. But under which business model and brand should this be launched? As products, cappuccinos and lattes, were thought to be more appropriate for the mid-tier mass-market, the new brand Nescafe Dolce Gusto was completely integrated into Nestlé's mass market business model. Dolce Gusto pods sell on retail shelves alongside Nescafe and also online.
(source: Alexander Osterwalder et al, 2010)


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