Pergamon

PII:

European Management Journal Vol. 18, No. 3, pp. 296–301, 2000  2000 Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(00)00011-6 0263-2373/00 $20.00

EXECUTIVE INTERVIEW

Changing the Strategy at Nespresso: An Interview with Former CEO Jean-Paul Gaillard
CONSTANTINOS MARKIDES, London Business School DANIEL OYON, University of Lausanne Background to the Interview
Nespresso represents one of the most innovative ´ new products developed by the Swiss giant, Nestle. The product is basically a system that allows the consumer to produce a fresh cup of espresso coffee at home. Though simple in appearance and use, it took Nestle more than 10 years to develop it. ´ The system consists of two parts: a coffee capsule and a machine. The coffee capsule is hermetically sealed in aluminum and contains 5 g of roast and ground coffee. The machine consists of four parts — a handle, a water container, a pump and an electrical heating system. These four parts are cast into a body and form the machine. The use of the Nespresso system is straightforward. The coffee capsule is placed in the handle which is then inserted into the machine. The act of inserting the handle into the machine pierces the coffee capsule at the top. At the press of a button, pressurized, steamed water is passed through the capsule. The result is a creamy, foamy and high-quality cup of espresso coffee. The new product was introduced in 1986. The orig´ inal strategy adopted by Nestle 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) was supposed to purchase the
296

machines from another Swiss Company (called ´ Turmix), the coffee capsules from Nestle and then 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 Nestle to support ´ the joint venture and to service and maintain the machines. By 1988, the whole thing was an acknowledged non-starter and headquarters was considering freezing the operation. That’s when Jean-Paul Gaillard arrived on the scene, first as Commercial Director of Nespresso S.A. and then as CEO of Nestle Coffee ´ Specialties S.A. The new strategy that he introduced in 1988–89 turned the operation around and established it as a profitable and growing unit within Nestle. ´ Mr Gaillard introduced several changes but the logic that drove all his actions was the belief that the coffee side of the operation had to be separated from the machine side. Since Nestle was not in the ´ machine business, he felt he had to focus on coffee. On the machine side, he assigned the manufacture of the Nespresso machine to a Swiss-based OEM which then supplied a variety of carefully selected manufacturers such as Krupps, National, Turmix and Philips. They, in turn, sold the Nespresso machine to prestigious retailers like Harrods, GalerEuropean Management Journal Vol 18 No 3 June 2000

CHANGING THE STRATEGY AT NESPRESSO

ies Lafayette and Bloomingdale’s. It was the responsibility of these retailers — under the guidance and control of Nespresso — to promote, demonstrate and finally sell the machine to the end consumer. It was also the responsibility of the machine partners to service and maintain the machines. On the coffee side, the Sobal partnership was terminated and the whole operation was placed under Nespresso S.A. (which was later renamed Nestle ´ Coffee Specialties S.A.). The target customer was changed from offices to households and the distribution of coffee capsules was organized through a ‘club’: once a customer bought a machine, he/she became a member of the Nespresso club. Orders of capsules were made through the phone or fax direct to the club and the capsules were shipped to the customer’s home within 24 hours. The club currently takes 7000 orders per day and it has ambitious plans for the future. Prominent among these is the creation of two new products to target two new customer segments: offices and young internet users. Eventually, the objective is to go after the mass market globally. The following interview was conducted at the end of 1998 in London by Constantinos Markides, Associate Editor of EMJ and Daniel Oyon, Professor at HEC, Lausanne.  2000 Elsevier Science Ltd. All rights reserved. When you joined Nespresso in 1988, what kind of operation did you inherit? Obviously, the new product was not living up to its potential but how bad was the situation really? ´ The situation was so bad that at Nestle headquarters, the likelihood was high that the project would be terminated. This was communicated to me just a few weeks after I had joined Nespresso as Commercial Director. I immediately told my management that if that was the case, I would leave ´ Nestle. I had joined the company specifically to work on the Nespresso project, so if that was terminated, I didn’t really want to stay on. I asked them to reconsider their decision. Specifically, I asked for two more years — one to show that we could make our sales targets and another year to prove that we can make our profitability targets. Deep down, I knew that if we changed our original strategy we could turn this operation around. What elements of the strategy at that time did you think were not working or were outright wrong? Did you feel the distribution was appropriate? First of all, as the saying goes, ‘it is difficult to do one job well, but to try to do two jobs at the same time is next to impossible!’. By mixing the coffee side of the business with

JG:

JG:

the machine side, we had a recipe for disaster. My first task was to separate these two and outsource the machine side so that we could concentrate on coffee — our core competence. To me, this was the most important element of the new strategy. Think about it: machines! We are not machine people, we come from a food company! You have to worry about guarantees, spare parts, etc. Can you imagine a warehouse full of what is needed to repair machines or replace spares? This was not our strength — we had to get out of it. At the same time, I felt that we had chosen the wrong customer to focus on. At the time, we were targeting small offices as our customer because we believed — incorrectly, if you ask me — that this segment was not as price sensitive as the individual consumers. We also felt that once a consumer tried the Nespresso coffee at the office, they will then buy it for their home. But how many times have you really taken things from your office to your home! It’s usually the other way round: you take things like lamps or carpets from your home to your office not vice versa. So, I felt we were targeting the wrong customer. My idea was to position Nespresso as an upmarket, premium product for the home. There was a huge potential here which we were failing to exploit because we chose to position our product as an office coffee. The distribution was not appropriate because it was all geared towards office coffee! If we were to target the consumer market, we had to develop the appropriate distribution strategy for this customer. Of course, we couldn’t abandon our existing distributors overnight. Some of them had long-term ´ relationships with Nestle, selling soluble coffee and milk. We therefore had to manage the existing channel while preparing a national launch on the consumer channel. This is exactly what we did. We decided to develop the retail outlets that would sell our system — stores like Harrods, Lafayette and Bloomingdale’s. To train them, we invented the Nespresso Coffee Academy and to help them in marketing the system we developed the appropriate merchandising. At the same time, we developed the Nespresso Club concept. If you bought a Nespresso machine, you immediately became a member of the Club. You could then order coffee capsules through the Club using mail order. The service we provided through the Club was first class. This is the most expensive coffee in the world so the service had to be world class — for example, we had a rule that said that the phone should
297

European Management Journal Vol 18 No 3 June 2000

CHANGING THE STRATEGY AT NESPRESSO

JG:

JG:

JG:

JG:

not ring more than three times; nor should the customer ever talk to an answering machine. The Club was in a position to answer everything the customer asked for. What other strategic changes did you introduce? We had to create a team of people that believed in the new strategy and supported it. At the time, we had very demotivated people — I had to change that. At the time, you were only the Commercial Director at Nespresso. How did you get your boss to agree to this dramatic change in strategy? Obviously that was a sensitive issue. First of all, I had to convince him of the need for a change in strategy. I also had to convince senior Nestle managers of this need. But I ´ did not rely only on persuasion because I knew that this was not enough. My philosophy during that time was to ask for forgiveness, not permission. In other words, I did things without always having the authorization beforehand. The kind of dialogue that would normally take place would go like this: ‘why didn’t you tell me about this before doing it?’ to which I would reply: ‘because if I had told you about it, you would have said no!’ However, every decision was taken in a well thought-out and careful manner. Did you have any reservations that maybe some of the new ideas you came up with may not be the correct ones? Not really but just to be safe, we tried a few of these ideas in a limited way to make sure they worked. For example, my proposal to target households rather than offices was resisted by top management. I therefore said: ‘fine, let’s try this one out.’ We went to two home-appliance outlets in Geneva, to two more in Lausanne and another one in Nyon and started selling machines to individual customers. My goal was to try this out for a week to see if we could sell 100 machines in that period. In the end, we only sold 58 but I didn’t really tell this to my boss! Why did you do it like this? Why didn’t you basically do some market research to see if individual households would be interested in this new product? Market research was done by my predecessors who found that there was no market for Nespresso. Market research cannot work for really new products. Look at mobile phones and fax machines — market research at the time they were developed suggested that there’s no market for these products. But look at them now! I would say that market research is useful but only for checking things that already exist. Consumers can only give you meaningful

JG:

JG:

JG:

JG:

JG:

JG:

feedback on what they already know. Going back to your story, you said that you carried out this experiment with the objective of selling 100 machines. You only sold 58. But you did not say this to your boss! What did you tell him? Well, it so happened that our salesmen had also sold another 25 machines to offices during that time. We knew that those machines were destined to end up in private households. I could therefore argue that we had sold 83 in total which is close enough to our target. Did that convince top management to adopt your proposed strategy? Only to a certain extent. But we proceeded with the preparation of a new strategy anyway: I first negotiated a contract with Turmix to manufacture the Nespresso machines. Based on this contract, we launched the new product nationally. But did top management approve that? Yes they did, but most of them did not believe that we would be successful. They gave us a year to prove that we had a successful formula. How successful was the new strategy? Did you see signs of success early on? The new strategy was very successful, but it took 3 months for the thing to really take off. During these first 3 months we were at the office every morning charting every sale we made! We kept adding to our sales chart, machine by machine, unit by unit. It was wonderful. That must have generated quite a lot of enthusiasm internally? Yes, it was like a scorecard that told us how we were doing in the market. Then, after 3 months, the new strategy really took off! It was wonderful to see because there were many people within Nestle who really didn’t ´ believe that we could make this thing work. Remember, these managers came from the regular food business and had a traditional food business mentality. That basically told them that it is impossible to sell coffee at such a high price with an expensive machine ´ to go along, all through mail order. Nestle is a mass market company which is excellent at selling loads of mass market products. The idea of selling high-end products or systems was alien to them. So we didn’t get much support initially. But once we established that the basic concept had promise, it was a matter of scaling it up and accelerating its growth. Could it be also the case that Nestle was ´ not enthusiastic about Nespresso because it was perceived as a threat to the instant coffee business? The size of the espresso business was so
European Management Journal Vol 18 No 3 June 2000

298

CHANGING THE STRATEGY AT NESPRESSO

JG:

JG:

JG:

small that it was not really a threat to agreements with machine manufacturers ´ Nescafe. But, you know how these things go: such as Turmix, Jura, Alessi, Krupps and if you run a big car company and one day Philips. Our presence in several countries somebody starts selling small aeroplanes was important to these machine which could replace your cars in the future, manufacturers — I don’t think we could you begin to worry. Even if he sells only have got any interest from them if we just two planes every month, you worry that one operated in one or two countries. Most of day it will cannibalise your car business the machine partners are now signed with entirely. The same fear may have existed Nespresso which protects us against ´ within Nestle. But I honestly think that the competition. This is a key point for us. ´ real source of resistance was cultural: Nestle What was the competition doing at this is a company which is used to selling honest time? products at reasonable prices. Our approach JG: Sleeping or imitating us. For example, was to sell luxury and this was creating Lavazza tried to develop a club of their own some sort of uneasiness in the organisation. but it didn’t work. It’s not enough to just People were saying: ‘this is not us. This is come up with an idea — execution and ´ not Nestle.’ It was like attention to detail is when you see some of equally important. They You cannot get anything your colleagues lacked the service and dressing up in £100 ties the flexibility to done in a big organisation or £300 shirts — you respond fast. We were begin to think that faster and better than without the help of allies maybe they are going them. slightly overboard! Taking a helicopter How did you handle this uneasiness or view of what you did between 1988 when resistance or lack of enthusiasm from you joined Nespresso as Commercial Nestle? Director until 1997 when you left ´ You have two ways to go about that. You Nespresso to lead the ice cream business of ´ could try to discuss with people and Nestle in the US, one can say that you convince them about your way. Or you introduced a new strategy early on (around could take a more political approach. I chose 1989–90) but then spent the next 7 years the latter — never explain, never apologize. I fine tuning this new strategy. Is this true or did my job and I let the numbers do the were there any other major strategic talking. To facilitate this, I actually moved changes in the period 1990–97? ´ our head office from Vevey (Nestle’s JG: I would say that’s basically true. We have headquarters) to Pully. That gave me some expanded on the original concept and we space and breathing room in that I didn’t developed a few other strategic alternatives ´ have to talk to Nestle people all the time. but the original formula has remained the Did you try to create any allies? same. Yes of course. You cannot get anything done This is interesting. It has become popular in a big organisation without the help and these days to argue that given the dynamic support of allies. The best allies are those environment in which we all live, a that have the power to overcome resistance strategy must remain flexible adjustable to and make things happen. In my case, the outside forces. How does that relate to your allies whose support was crucial were the experience at Nespresso? executive VP of Marketing, Mr Camillo JG: The basic strategy at Nespresso has always Pagano and the executive VP in charge of been the same in the last ten years. Sure, we Asia, Mr Rudolf Tschan. have refined it, corrected it and added to it. You introduced all these changes while still But the basic parameters have stayed the the Commercial Director of Nespresso. same. When you are Marlboro you are When did you get promoted to the senior Marlboro — you have to remain Marlboro. position of President of Nespresso? What do you mean when you say ‘you have In 1991. It was then that I decided to refined the strategy.’ develop more markets for our product. At JG: For example, we have tried to widen and the time, we were selling in Switzerland, broaden the market by going into other Japan and Italy. From there, we moved to countries and by targeting other customer France in 1990–91 and then to the Benelux segments and offering them the products countries and the USA. Spain, the UK and they want. ´ other European markets followed. Today, the In 1997 you took over Nestle’s ice-cream company is still growing strongly thanks to business in the USA. You have since the investments made in these markets. moved to Movenpick where you are the At the same time, I was able to sign Head of a Division. Given your experiences
299

European Management Journal Vol 18 No 3 June 2000

CHANGING THE STRATEGY AT NESPRESSO

JG:

JG:

JG:

in these companies, can you give us some advice on how we could promote innovation in big companies? Top management must encourage subordinates to come up with ideas and reward them when they succeed. But it must also stop punishing people when they fail otherwise nobody would be willing to take any risks. I always tell my people, ‘if you make a mistake but take the necessary steps to correct it, then I don’t care. But if you don’t do anything to correct your mistake, then I have a problem.’ The key point for big companies is to develop a culture and the reward systems which are based less on risk avoidance and more on risk taking. So you think that to promote innovation in big companies, we need leadership from the top as well as incentives and a culture that supports innovation? If somebody flops trying to be innovative and everyone in the organisation points the finger and says this guy is bad, then you will have a company that is going to slowly die like the dinosaurs. On the other hand, if somebody flops but the culture says: ‘yes he flopped but at least he tried and therefore he deserves to be promoted,’ then you have a healthy company that’s bound to succeed. A perfect example of this is the current CEO of Unilever — despite his major mistake in the detergents business, he still made it to the top. You make it sound so simple. Why don’t we find more companies out there that do these things? I think it is psychological. When people are self-secure and confident of their abilities, they would be willing to take risks. I also think that our companies are too big and too hierarchical for their own good. I am in favour of breaking big companies into

JG:

JG:

´ smaller pieces. Take for example, Nestle. I believe it should be gradually divided into world-wide product divisions each one having a profit and loss responsibility. In addition, I would suggest that it establishes a separate business unit each time an innovation or a business opportunity with significant growth, size and return potential comes up. Some companies such as 3M have introduced this principle as an organisational philosophy. You are an entrepreneurial type of a person. Do you think that entrepreneurial people like you can strive and prosper in big organisations? Yes, in some of them. But the big organisations must develop the culture and the incentives that would allow entrepreneurial people to shine. It is difficult to do it in big companies but I think it is possible. In any case, it will soon cease to be a luxury and become a matter of life and death: stock market pressures will make it necessary that big companies should either find ways to promote entrepreneurship internally or they will become extinct like the dinosaurs. Having worked in Europe and America, do you think the American companies have an advantage over the European companies when it comes to innovation? Yes and no. They have an advantage because of their open management style. But they have a disadvantage because they tend to be short-term oriented. Overall, I am bullish about Europe. If European companies can adopt the openness of the American style without losing their own advantages then I think you will see many more European companies leading their respective industries in the future.

300

European Management Journal Vol 18 No 3 June 2000

CHANGING THE STRATEGY AT NESPRESSO

CONSTANTINOS MARKIDES, London Business School, Sussex Place, Regent’s Park, London NW1 4SA. E-mail: c.markides@London.edu Constantinos Markides is Professor of Strategic Management at London Business School and Associate Editor of the European Management Journal. He has researched and published in the fields of international competitiveness, corporate restructuring, refocusing and international acquisitions. JEAN-PAUL GAILLARD, Fadenstrasse 27, CH-6300 Zug, Switzerland. Jean-Paul Gaillard is currently CEO of Movenpick ¨ Foods Ltd, Cham (Zug), Switzerland. Educated in the USA and UK he graduated from IMD Lausanne’s Senior Executive Program ´ in 1995. Previous posts include President of Nestle, USA (Ice-cream division), President of Nespresso S.A., Switzerland, European Branch Manager for Philip Morros Europe, in Lausanne, and Business Development Analyst for Warner Electric Europe, also in Lausanne.

DANIEL OYON, Ecole des ´ Hautes Etudes, Universite ˆ de Lausanne, Batiment des ´ Facultes des sciences Humaines, CH-1015, Lausanne-Dorigny, Switzerland. Daniel Oyon is Professor of Management Control and Director of the Master of International Management Programme (MIM) at the University of Lausanne. His research centres on business strategy, management control systems, innovation and international business.

European Management Journal Vol 18 No 3 June 2000

301