Wk7-01 Application Video, The Nespresso Business Model
Alex Osterwalder's advice that we must think like designers, and not fall in love with our first business model is wise. It's also very difficult to follow especially if you're innovating within an existing business, as most of us are. You have ingrained habits for creating and delivering value along your favorite dimension, forward or back. Your current business model, and it's profit logic, acts like a constant gravitational pull. That conforms your innovation to your way of creating, delivering and capturing value. Breaking free of that, gravitational pull is harder than it looks. It takes working like a designer. This gravitational pull has many causes. Clayton Christensen described the financial pull generated by the bias towards efficiency and sustained innovations, innovations that stay within the orbit of your known business and profit logic. Your brain also pulls you, in towards your existing business model. Your brain is biased in favor of your current beliefs. It ignores data that contradicts what you believe to be true about your customers, your market and your profits. Your brain is also motivated not to change your business model. Even when it's failing. Simply because you feel responsible for helping create the model. So, it turns out that innovation is not for the faint of heart. Or the faint of mind. The gravitational pull of our first, or our current, business model helps explain why so much innovation proceeds through painful trial and error. The trial and error is an unavoidable part of learning. The pain however, is mostly self-inflected. If we learn to experiment with our business model and learn as we innovate, we'll reduce the pain and the cost of innovating, while increasing our rates of success. » Consider the example of Nestle, among the largest of the world's food companies. Big, competitive, and ever conscious of controlling it's costs, Nestle held a dominant share of almost every industry category it served. In coffee, one of the world's largest and oldest commodities, Nestle dominated the instant coffee category. In the 1970s, Nestle's Nescafe brand held the dominant share of instant coffee market. They sold it to the mass market of retail consumers through retail stores that Nestle carefully cultivated with its retail partners. Nestle's relationship with its coffee customers, as with all of its package food customers was an arms length relationship of retail transactions. These retail sales generated low margin revenues. So, Nestle focused on innovating in production and marketing in order to make its manufacturing plants efficient, and its portfolio of products strong. Like all commodity businesses, costs were tightly managed and controlled. The only problem with Nestle's dominance of instant coffee was that instant coffee was one of the smaller coffee categories. Roast and ground coffee, made in coffee makers of all types was over twice the size. Roast and ground coffee accounted for 70% of all the coffee consumed in the world. But Nestle was fourth in the roast in ground market. Eager to find ways into the roast in ground market, in 1974 Nestle bought the rights to commercialize a new type of espresso brewing system that used pods of coffee to brew individual servings. Once they have perfected and patented the machine, which they eventually named an Espresso, Nestle set their sights on Espresso consumers and on the existing channels to those Espresso drinkers. The cafes and restaurants where the majority of consumers drank Espresso. The Nespresso machine was compact in size, and its pod brewing process was clean and easy to use. You would've thought that restaurants and cafes would have loved it. But like many an innovator's assumption, this one proved to be false. Nestle had never marketed machines to restaurants or cafes. Once they did they discovered that the barista's viewed the machines as a threat to their livelihood. And that the restaurant kitchens didn't need the space savings, and were not willing to pay higher prices for the cleaner and easy to brew servings. [SOUND] In other words Nestle's first business model flopped [SOUND]. In 1986, sensing that the gravitational pull of its existing business model and profit logic was about to kill the struggling innovation, Nestle set up a separate Skunk Work company in a separate building to continue incubating espresso. The new venture expanded its customer segments to include the office market, and partnered with a coffee machine maker who was focused on the same market segment. But this too, flopped. [SOUND] What's an innovator to do? You can think of all these attempts by Nestle as experiments. Each of the experiments gave Nestle an opportunity to learn. Imagine that you're on the team of Nespresso. You've learned that your cafe, restaurant, and office model for the Nespresso business is not working. What are you going to do next?
