Introduction: A brief introduction of the case study and company’s new product.Identify the key problem/Issue discussed in the case studyAnalysis of strategic and financial factors Café-XIn Search of Strategy: Nestlé's New Espresso MakerIn 1986, the Swiss giant Nestlé introduced a new type of espresso machine in the Swiss market. Itrepresented one of the most innovative new products developed by its R&D department. Through the use ofcoffee capsules, the patented system combined the taste of real espresso coffee with convenience and easeof use.Despite an enthusiastic reception from connoisseur coffee drinkers and very promising market research, inthe first few years after its introduction, the CoffeeMaker was far from living up to its expectations. In fact,the dedicated business unit was losing money. Therefore, in March 1988, Nestlé appointed a new, youngManaging Director, by the name of Jean-Paul Gaillard.Gaillard was considering what to do to improve the new product's fortunes. He realized that, unless sales ofthe CoffeeMaker picked up considerably soon, Nestlé would have no choice but to stop investing in thenew product. He wondered whether he should give the current strategy more time to play itself out, or| whether to devise a completely new strategy for the product?Coffee Industry TrendsMarket research showed that in existing coffee sectors, consumers were becoming more adventurous intheir buying behavior and tended to favor the premium and super premium end of the market. These newmarkets were growing at the expense of instant powdered coffee.Other changes taking place in the coffee market included: (1) an increasing popularity of cafes and coffeebars; (2) rising brand consciousness; and (3) the rising price-consciousness of the mass market consumer,who switched to supermarket brands if the price of coffee rose.The Rise of EspressoEspresso coffee is coffee of the greatest possible strength, implying thicker consistency and more caffeineper unit volume than most beverages. Its quality is determined by the "fineness" of the coffee used, whichin turn depends onmachines, in which water and steam are forced through the ground coffee under pressure, need the finestgrinds of all in order to produce coffee of the greatest possible strength. Espresso coffee was traditionallypopular in Italy, Spain and France but it was also becoming more popular in other European countries andthe US.the grind as well as on the type of appliance with which it's being prepared. EspressoNestlé's Positions in CoffeeNestlé held a dominant market position in instant coffee. Soluble coffee was the biggest money-maker forNestlé and it represented more than 80% of Nestlé's coffee sales, with the rest coming from roast aground coffee sales. It had strong brands in all the sub-segments of the instant-coffee market, yet Nestlé feltit could not rest on its laurels. Its traditional competitors were becoming more aggressive and supermarketchains were entering the market through their own brands. Nestlé began to segment the soluble coffeemarket into finer and finer segments. This gave a further boost to the demand for instant coffee but did notattract the high-end consumer who required a foamier coffee, achievable only with the use of pressurizedwater.' This case is based on research by Costas Markides, Professor of Strategic & International Management at the LondonBusiness SchoolHistory of the EspressoMakerThe origins of the new EspressoMaker date back to the late 1960s. Continuous experimentation over a tenyear period had led to the final system that consisted of two parts: a coffee capsule and a machine. Thecoffee capsule contained 5g of roast and ground coffee. The machine was jointly developed with the Swissmachine manufacturer Turmix. The use of the new system was rather straightforward. The capsule wasmanually placed in the handle, which was introduced into the machine. This action pierced the coffeecapsule at the top. At the press of a button, pressurized, steamed water was passed through the capsule andthe result was a creamy, foamy, high-quality cup of espresso coffee.Strategic Positioning, 1985-87The success of the EspressoMaker depended not only on the coffee product (i.e. the coffee capsules) whichNestlé controlled, but also on the quality of the appliances used (outside Nestlé's control) and lastly, on theability to produce and sell to a mass market. This dependence on outsiders was unusual for Nestlé. Inaddition, the product threatened to cannibalize the sales of other Nestlé products.Nestlé set up a joint venture with a Swiss-based operator called Sobal to sell the new product. The jointventure (Sobal-EspressoMaker) purchased the machines from Turmix and the coffee capsules from Nestléand then distributed and sold everything as a system-one product, one price. A separate unit calledEspressoMaker S.A. supported the joint venture and provided technical and marketing advice. As shown inExhibit 1, twenty-two other distributors were given permission to sell EspressoMaker machines.Choice of CustomersWith the EspressoMaker, Nestlé would no longer be selling merely a product, but also the requiredhardware and the related services. This required Nestlé to focus on the production of high quality coffeecapsules, a service offering to satisfy the customer, the manufacturing of reliable machines, the training ofpeople on how to operate the system, and the organization of a maintenance workforce.Once the target countries were chosen (initially Switzerland, Italy, France and Japan), Nestlé furtherdefined target market segments. Nestlé felt that the high cost of the machines and the capsules meant thathousehold users would not find the EspressoMaker product attractive. By contrast, offices and smallcompanies were thought to be less price-sensitive and more likely to buy the EspressoMaker system as aperk for their employees. Small and medium sized companies were therefore identified as the primarytarget market-these companies were unlikely to buy a sophisticated, large-scale espresso machine butwould be receptive to the EspressoMaker system as an attractive alternative due to its relatively cheap priceand its ease-of-use and reliability.Selling and DistributionThe EspressoMaker machines were sold either by Sobal- EspressoMaker or by 22 other distributors. Sobal-EspressoMaker approached customers through a direct mailing campaign all over Switzerland. If interested,the customer filled out and returned a simple form at which point the Sobal salespeople approachedhimher. The EspressoMaker machine would then be delivered to the customer. The joint-venture had nosales force, so it depended on Sobal personnel. However, the Sobal sales force consisted of tworepresentatives and two technicians for whom the sale of EspressoMaker machines was only one of theirnumerous responsibilities. As a result, the 22 other distributors of the EspressoMaker machines played animportant roleSobal was a small company active in the distribution of a wide variety of products (appliances, cosmetics, etc). The customer could order coffee capsules either directly from the Sobal- EspressoMaker joint venture orfrom the distributors. The joint-venture preferred to sell the machines at a high price but kept the prices ofthe coffee capsules low. On the other hand, the distributors favored leasing of the machines and selling thecapsules at a high price. It was in the sale of capsules that the distributors made their money.ProductionIt was decided that one of SPN's (Société des Produits Nestlé) small coffee factories located in Switzerlandwould be responsible for the production of the coffee capsules.The production of the machines was a more difficult issue. Natural partners to manufacture the machinesincluded companies whose existing business included the manufacture and distribution all kinds ofhousehold appliances, including coffee machines. Sub-contracting manufacturing to one of thesecompanies was risky because they had little incentive to promote the EspressoMaker machines. Most ofthese potential partners already had in their product offerrings a machine for roast and ground coffee soldunder their own brand name. However, Nestlé believed that these subcontractors would realize that it wasbetter for them to cannibalize their own products than for one of their competitors to do it for them-especially with an innovation as promising as the EspressoMaker system. Therefore, the real issues forNestlé related more to the volumes and the margins that it would be willing to accept from thesesubcontractors than whether to subcontract to them or not. In the end, Turmix was selected as the main sub-contractor for the production of the machines to be sold in Europe.Pricing and ServicesTest markets showed that coffee made with a EspressoMaker machine was excellent but that there werefew customers who would buy a machine at SFr. 600 and pay an additional SFr. 0.30 per cup of coffee. Itwas therefore decided that potential elients would receive machines on a trial basis. Coffee capsules wouldnow be sold at SFr. 0.60 a piece. For EspressoMaker, the lending of machines to customers would stimulateinterest in the new system. For the customer, the "try now, buy later" approach was very attractive. Thoseinterested in owning a machine could purchase the machine with or without services (services included afive year warranty and on-site assistance). The coffee capsules were manufactured by SPN in Orbe,Switzerland, and sold to the joint venture. As with the machines, the capsules were either directly sold tocustomers of the joint-venture or through dealers.Results of the first two years: 1986-1987Table 1 presents the results of the first two years in terms of machine sales. The targets were far from beingreached and the actual results barely amounted to half of the targeted figures.Table 1:Number of machines manufactured and sold in 1986/87 (in units)Machines ModelC 100C1100C 1101Total3,9392,487Manufactured15,6629,8522,80022,40112,339SoldIn terms of coffee capsules, the volume sold in the first two years was also far below the forecast volume.Despite a major jump in 1987, the volume sold in tons of coffee did not reach the amounts expected byNestlé at launch time in 1985. Unless the sales of machines picked up considerably, there was little hopethat coffee capsule sales could improve a lot.3The financial numbers (Table 2), reflected the disappointing sales of machines and coffee capsules.Investments in the launch of the EspressoMaker system in Japan worsened the situation. It should be notedthat R&D costs spent up-front (about Sfr, 1,756,000) are not accounted for in Table 2.There were other warning signs on the horizon. The machines were not reliable, leading to continuousmaintenance and service. Defective parts led to high costs of repair which often outweighed the cost of anew machine. On the distribution side, distributors had not reached sales targets, making EspressoMaker'ssurvival diflicult.Table 2:Operating results for EspressoMaker S.A. and worldwide,1986-8719861987Sales1,485-1.512-1,082713.842Cost of goods soldOperating margin-3.357-1,979197Fees on machines soldR&D-500-2,282Operating results of EspressoMaker S.A-1.011Operating results of EspressoMaker SAOperating results of Nestlé JapanLoss on transfer pricingOperating results of SPNGains on taxesFinancial costs-1,011-1.782NANA-1,974343NA-277NANA1,167-90-1,011-3,799What to do?It was clear that the current strategy was not producing the desired results but Jean-Paul Gaillard wasunsure whether the strategy had to be radically changed or whether it was a just a matter of allowing thecurrent strategy to play itself out. Even if he decided in favor of changing the current strategy, the questionwas, "change towards whar?"

Question

Introduction: A brief introduction of the case study and company’s new product.Identify the key problem/Issue discussed in the case studyAnalysis of strategic and financial factors Café-XIn Search of Strategy: Nestlé's New Espresso MakerIn 1986, the Swiss giant Nestlé introduced a new type of espresso machine in the Swiss market. Itrepresented one of the most innovative new products developed by its R&D department. Through the use ofcoffee capsules, the patented system combined the taste of real espresso coffee with convenience and easeof use.Despite an enthusiastic reception from connoisseur coffee drinkers and very promising market research, inthe first few years after its introduction, the CoffeeMaker was far from living up to its expectations. In fact,the dedicated business unit was losing money. Therefore, in March 1988, Nestlé appointed a new, youngManaging Director, by the name of Jean-Paul Gaillard.Gaillard was considering what to do to improve the new product's fortunes. He realized that, unless sales ofthe CoffeeMaker picked up considerably soon, Nestlé would have no choice but to stop investing in thenew product. He wondered whether he should give the current strategy more time to play itself out, or| whether to devise a completely new strategy for the product?Coffee Industry TrendsMarket research showed that in existing coffee sectors, consumers were becoming more adventurous intheir buying behavior and tended to favor the premium and super premium end of the market. These newmarkets were growing at the expense of instant powdered coffee.Other changes taking place in the coffee market included: (1) an increasing popularity of cafes and coffeebars; (2) rising brand consciousness; and (3) the rising price-consciousness of the mass market consumer,who switched to supermarket brands if the price of coffee rose.The Rise of EspressoEspresso coffee is coffee of the greatest possible strength, implying thicker consistency and more caffeineper unit volume than most beverages. Its quality is determined by the &#34;fineness&#34; of the coffee used, whichin turn depends onmachines, in which water and steam are forced through the ground coffee under pressure, need the finestgrinds of all in order to produce coffee of the greatest possible strength. Espresso coffee was traditionallypopular in Italy, Spain and France but it was also becoming more popular in other European countries andthe US.the grind as well as on the type of appliance with which it's being prepared. EspressoNestlé's Positions in CoffeeNestlé held a dominant market position in instant coffee. Soluble coffee was the biggest money-maker forNestlé and it represented more than 80% of Nestlé's coffee sales, with the rest coming from roast aground coffee sales. It had strong brands in all the sub-segments of the instant-coffee market, yet Nestlé feltit could not rest on its laurels. Its traditional competitors were becoming more aggressive and supermarketchains were entering the market through their own brands. Nestlé began to segment the soluble coffeemarket into finer and finer segments. This gave a further boost to the demand for instant coffee but did notattract the high-end consumer who required a foamier coffee, achievable only with the use of pressurizedwater.' This case is based on research by Costas Markides, Professor of Strategic & International Management at the LondonBusiness SchoolHistory of the EspressoMakerThe origins of the new EspressoMaker date back to the late 1960s. Continuous experimentation over a tenyear period had led to the final system that consisted of two parts: a coffee capsule and a machine. Thecoffee capsule contained 5g of roast and ground coffee. The machine was jointly developed with the Swissmachine manufacturer Turmix. The use of the new system was rather straightforward. The capsule wasmanually placed in the handle, which was introduced into the machine. This action pierced the coffeecapsule at the top. At the press of a button, pressurized, steamed water was passed through the capsule andthe result was a creamy, foamy, high-quality cup of espresso coffee.Strategic Positioning, 1985-87The success of the EspressoMaker depended not only on the coffee product (i.e. the coffee capsules) whichNestlé controlled, but also on the quality of the appliances used (outside Nestlé's control) and lastly, on theability to produce and sell to a mass market. This dependence on outsiders was unusual for Nestlé. Inaddition, the product threatened to cannibalize the sales of other Nestlé products.Nestlé set up a joint venture with a Swiss-based operator called Sobal to sell the new product. The jointventure (Sobal-EspressoMaker) purchased the machines from Turmix and the coffee capsules from Nestléand then distributed and sold everything as a system-one product, one price. A separate unit calledEspressoMaker S.A. supported the joint venture and provided technical and marketing advice. As shown inExhibit 1, twenty-two other distributors were given permission to sell EspressoMaker machines.Choice of CustomersWith the EspressoMaker, Nestlé would no longer be selling merely a product, but also the requiredhardware and the related services. This required Nestlé to focus on the production of high quality coffeecapsules, a service offering to satisfy the customer, the manufacturing of reliable machines, the training ofpeople on how to operate the system, and the organization of a maintenance workforce.Once the target countries were chosen (initially Switzerland, Italy, France and Japan), Nestlé furtherdefined target market segments. Nestlé felt that the high cost of the machines and the capsules meant thathousehold users would not find the EspressoMaker product attractive. By contrast, offices and smallcompanies were thought to be less price-sensitive and more likely to buy the EspressoMaker system as aperk for their employees. Small and medium sized companies were therefore identified as the primarytarget market-these companies were unlikely to buy a sophisticated, large-scale espresso machine butwould be receptive to the EspressoMaker system as an attractive alternative due to its relatively cheap priceand its ease-of-use and reliability.Selling and DistributionThe EspressoMaker machines were sold either by Sobal- EspressoMaker or by 22 other distributors. Sobal-EspressoMaker approached customers through a direct mailing campaign all over Switzerland. If interested,the customer filled out and returned a simple form at which point the Sobal salespeople approachedhimher. The EspressoMaker machine would then be delivered to the customer. The joint-venture had nosales force, so it depended on Sobal personnel. However, the Sobal sales force consisted of tworepresentatives and two technicians for whom the sale of EspressoMaker machines was only one of theirnumerous responsibilities. As a result, the 22 other distributors of the EspressoMaker machines played animportant roleSobal was a small company active in the distribution of a wide variety of products (appliances, cosmetics, etc). The customer could order coffee capsules either directly from the Sobal- EspressoMaker joint venture orfrom the distributors. The joint-venture preferred to sell the machines at a high price but kept the prices ofthe coffee capsules low. On the other hand, the distributors favored leasing of the machines and selling thecapsules at a high price. It was in the sale of capsules that the distributors made their money.ProductionIt was decided that one of SPN's (Société des Produits Nestlé) small coffee factories located in Switzerlandwould be responsible for the production of the coffee capsules.The production of the machines was a more difficult issue. Natural partners to manufacture the machinesincluded companies whose existing business included the manufacture and distribution all kinds ofhousehold appliances, including coffee machines. Sub-contracting manufacturing to one of thesecompanies was risky because they had little incentive to promote the EspressoMaker machines. Most ofthese potential partners already had in their product offerrings a machine for roast and ground coffee soldunder their own brand name. However, Nestlé believed that these subcontractors would realize that it wasbetter for them to cannibalize their own products than for one of their competitors to do it for them-especially with an innovation as promising as the EspressoMaker system. Therefore, the real issues forNestlé related more to the volumes and the margins that it would be willing to accept from thesesubcontractors than whether to subcontract to them or not. In the end, Turmix was selected as the main sub-contractor for the production of the machines to be sold in Europe.Pricing and ServicesTest markets showed that coffee made with a EspressoMaker machine was excellent but that there werefew customers who would buy a machine at SFr. 600 and pay an additional SFr. 0.30 per cup of coffee. Itwas therefore decided that potential elients would receive machines on a trial basis. Coffee capsules wouldnow be sold at SFr. 0.60 a piece. For EspressoMaker, the lending of machines to customers would stimulateinterest in the new system. For the customer, the &#34;try now, buy later&#34; approach was very attractive. Thoseinterested in owning a machine could purchase the machine with or without services (services included afive year warranty and on-site assistance). The coffee capsules were manufactured by SPN in Orbe,Switzerland, and sold to the joint venture. As with the machines, the capsules were either directly sold tocustomers of the joint-venture or through dealers.Results of the first two years: 1986-1987Table 1 presents the results of the first two years in terms of machine sales. The targets were far from beingreached and the actual results barely amounted to half of the targeted figures.Table 1:Number of machines manufactured and sold in 1986/87 (in units)Machines ModelC 100C1100C 1101Total3,9392,487Manufactured15,6629,8522,80022,40112,339SoldIn terms of coffee capsules, the volume sold in the first two years was also far below the forecast volume.Despite a major jump in 1987, the volume sold in tons of coffee did not reach the amounts expected byNestlé at launch time in 1985. Unless the sales of machines picked up considerably, there was little hopethat coffee capsule sales could improve a lot.3The financial numbers (Table 2), reflected the disappointing sales of machines and coffee capsules.Investments in the launch of the EspressoMaker system in Japan worsened the situation. It should be notedthat R&D costs spent up-front (about Sfr, 1,756,000) are not accounted for in Table 2.There were other warning signs on the horizon. The machines were not reliable, leading to continuousmaintenance and service. Defective parts led to high costs of repair which often outweighed the cost of anew machine. On the distribution side, distributors had not reached sales targets, making EspressoMaker'ssurvival diflicult.Table 2:Operating results for EspressoMaker S.A. and worldwide,1986-8719861987Sales1,485-1.512-1,082713.842Cost of goods soldOperating margin-3.357-1,979197Fees on machines soldR&D-500-2,282Operating results of EspressoMaker S.A-1.011Operating results of EspressoMaker SAOperating results of Nestlé JapanLoss on transfer pricingOperating results of SPNGains on taxesFinancial costs-1,011-1.782NANA-1,974343NA-277NANA1,167-90-1,011-3,799What to do?It was clear that the current strategy was not producing the desired results but Jean-Paul Gaillard wasunsure whether the strategy had to be radically changed or whether it was a just a matter of allowing thecurrent strategy to play itself out. Even if he decided in favor of changing the current strategy, the questionwas, &#34;change towards whar?&#34;

Accepted Answer

A case study of an old and new product involves analyzing the launch and performance of both…