Category: Case studies

Case studies, entrepreneurship, Management, Society

Being Yourself in an Era of Corporate Legitimacy Challenge: Lessons from the Coinbase Story

Faced with the legitimacy challenge they currently face, companies are often tempted to react defensively, bow to the zeitgeist, and hope for the best. Often, the only solution is to build a mask to protect themselves. The problem is that it creates a chasm between who they really are and who they pretend to be, which only increases suspicion. The story of Coinbase, a U.S. startup that found itself in the spotlight, shows that a radically opposite approach of asserting one’s uniqueness is not only possible, but pays off. 

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Case studies, In the news, Theory

Nespresso: victim of a low-end disruption?

Interestingly, the posts on Nespresso are among the most popular on this blog. Every time I write about this product, audience shoots up, so why not continue… especially given that there is an interesting news with the launch of Nespresso compatible capsules by a new company called Ethical Coffee Company (ECC).

It is well known that Nespresso’s business model is mostly based on selling capsules on which Nestlé is able to make a very high margin. This margin is significantly higher than for the traditional filter coffee, Nestlé’s main business. This is in fact the same model as that of ink jet printer manufacturers: you buy a printer at a very low price; it usually barely covers the cost of the printer. The manufacturer makes its margin not on the printer, but on the cartridges, which are (relatively) very expensive.  This model comes from the razor and the blades model invented by Gillette. This model is not without benefits for some users, in particular for those who have limited needs in terms of quantities. In that case, the high relative cost for one page matters less than the low absolute one. What is interesting in the case of Nespresso is that Nestlé has been able to position the product in the premium segment, so they are able to sell the machines at a high price as well, thus having it both ways…

This positioning helped fuel the success of the product and drove its exceptional profitability. It was reinforced by the creation of the Nespresso Club, adding a sense of exclusivity, and the use of actor George Clooney in the ads. In addition, the Club provides valuable customer information for Nestlé, another innovation for a company that had until then always sold only through distribution channels.

Of course, the idea of a high-quality coffee at home quickly attracted competitors such as Senseo, a partnership between coffee house Douwe-Egberts and home appliance manufacturer Philips, or Tassimo. However, despite their success, and quite unlike what Pr Clayton Christensen would predict, these lower end competitors have not been able to really to “go up” and threaten Nespresso’s position in the higher end of the segment.

This could change thanks to the entry of a new type of competitor having a different strategy: Ethical Coffee Company (ECC). ECC’s idea is quite simply to create capsules that are compatible with Nespresso machines, yet cheaper. This is a strategy that has already been successful for printers and that manufacturers were not able to successfully counter. ECC, which like Nestlé is based out of Switzerland, assures that they have found a way not to violate Nespresso’s patents and produce perfectly legal compatible capsules. ECC’s threat should be taken seriously by Nestlé because its founder is no other than Jean-Paul Gaillard, the man who successfully launched… Nespresso back in the early 1990s. Gaillard is the manager called “Yannick Lang” in the infamous and controversial Nespresso case study from IMD written by Joyce Miller and Kamran Kashani. In addition, ECC has raised €20 million in private capital and is already in production.

ECC’s capsules are legally compatible with Nespresso machines, but 20% cheaper. In addition, they can be completely recycled, a very important point as the use of aluminum capsules by Nestlé has long been criticized by environmentalists. Each Nespresso user has probably experienced a growing sense of unease when throwing away the capsules. Lately, Nestlé has undertaken a recycling program but the way it is organized does not seem to be environmentally friendly.

What can Nestlé do? Moving “downwards” is difficult for two reasons. First, because the success of Senseo and Tassimo in the mid-range market means competition is solidly present, with big brands that have strong experience of the business and the distribution network, and for which the segment is core. So expect strong resistance here. Second, because ECC’s entry will quite likely successfully occupy the “value” segment of the capsule market. Third, because it is always difficult for a firm to move downwards, regardless of the competition: margins are lower but the cost base is the same, a sure crash. This would mean hurting the brand, a key issue as the brand, more than the quality of the coffee, is what drives Nespresso’s success since the beginning. It is difficult to imagine Nestlé introducing “value” (ie low end) coffee machines or selling the capsules in supermarkets (which would instantly mean losing 25% of the margin), sitting next to Tassimo’s.

The question is whether Nespresso’s positioning can be sustained. One can certainly expect a “Clooney fatigue”, not to mention the risk, shown recently by Tiger Woods, of associating a brand with a star who is also a human being, and as such subject to image problems. Despite all the talk about experience, Club exclusivity, and choice of over dozens of coffee types, what customers want is a nice cup of coffee, and too much complexity risk turning them off. Even a visit to a Nespresso shop can be an unpleasant experience when facing the snobbery of the clerks. Last time I went there, I felt like a peasant visiting the castle.

Can Nestlé move upwards? One could imagine Nestlé introducing diamond plated Nespresso machines at €1,000 and partnering with some luxury house. Despite the fact that times of economic recession are usually not appropriate for such positioning, this would smell classic “retreat in the high-value segments”, giving away lower segments to the competition, and putting itself into a corner eventually, something that GM has experienced with SUVs.

Clearly, Nestlé seems concerned. The Swiss firm recently sued a French Web site comparing prices for “disparagement” because the site had contended that Nespresso’s capsules where expensive and environmentally unfriendly. This is surprising because these are two well recognized facts. Nespresso is clearly positioned in the high-end of the market and Nestlé gets good margins on it. This is not a crime and nothing to be ashamed about, simply a positioning that has help fuel Nespresso’s success. Similarly, the environmental unfriendliness is still very common in manufacturing, and Nestlé has made efforts recently to address this question, albeit insufficiently. The trial seems to reflect more on Nestlé’s disarray and lack of strategic clue than anything else. Let’s hope the company will find better ways to deal with its strategic problem. ECC is now sold in France through the Casino supermarket chain. Let the consumers decide…

My previous post on the Nespresso innovation story here.

Note: I no longer update this blog. Instead, I am now writing a blog with a slightly different focus with my colleague Milo Jones on geopolitics, strategy, disruptions, and intelligence. Find it here: http://silberzahnjones.com.

Case studies, Theory

Framing: a key concept in the management of uncertainty and disruptions

The fog of war, a long 2003 interview of Robert S McNamara, shows that how one frames an issue has an influence on on how a question can be solved. As soon as they got engaged in Vietnam, the US presented the conflict as a fight between freedom and communism. This happened in the late fifties, after China had become communist and right after the Korean war, in a context in which the communist world seemed to progress inexorably. The domino theory, introduced by the Republican US president  Eisenhower in 1954, stated that once a country fell and became communist, neighboring countries also would. Hence it became crucial to defend any country facing a communist insurgency. As David Halberstam mentions in his book “The best and the brightest”, the US national context also played a role later in the Vietnam process: Harry Truman, Eisenhower’s Democratic predecessor, was accused during the cold war to have “lost” China in 1949 and to have been weak against the communists, particularly during the Mccarthyst period. A longstanding reputation of “Democratic weakness” persists to this day as a result. In the early 60s, the democrats were still traumatized by these accusations that were systematically used by their Republican adversaries. This is the initial cognitive frame with which the Vietnam question was analyzed by President Kennedy’s administration. Right from the beginning then, the administration was prisoner, without being aware of it, from a frame that was in effect imposed by their adversaries. Despite their doubts and mounting skepticism, they would remain unable, right until the very end, to get rid of it.

In the interview, McNamara tells the story of his encounter with his former enemies during his 1995 visit to Vietnam. Much to his surprise, he realizes then that Vietnamese were first and foremost nationalists before being communists. Hence, that the conflict could in fact be framed as a nationalistic fight for union and independence, something Americans could actually have been sympathetic to. He also realizes that there is nothing that the Vietnamese dislike more than the Chinese, thus showing the fallacy of the fear of a great Chinese plot in South-East Asia, and more generally of that of a grand union of communist countries against the western world. A knowledge that Richard Nixon and Henry Kissinger will use to their advantage in their opening to China to counter the Soviet Union.

Framing the conflict in terms of a moral fight of good versus evil and asserting the inevitability of the domino theory also raised the stake of the conflict considerably for the US, making it more difficult to withdraw and limiting their margin for maneuver. It’s difficult to give up when the freedom of the world is supposedly at stake, but much easier when it’s framed as a civil war in a distant country.

The concept of frame of course also applies to the corporation. It is especially important in periods of uncertainty and turbulence caused by disruptions. Disruptions bring about profound change that require corporations to review the way they perceive and analyze their environment. Any corporation use a frame that is the result of past experience and of what the corporation has learned about its successes and failures. The more the corporation has been successful, usually the stronger the frame and the more difficult to change. For instance, raised in technological excellence, telecom operators denied the significance of internet telephony on account that it was not working well. GM discounted the importance of the Japanese cars in the seventies from the height of its market share. Kodak reacted to the emergence of digital photography by inventing a… digital film (APS) simply because the company was unable to imagine a world without films, and as a result tried to ‘cram’ the new technology into the old, to use Clayton Christensen’s expression. More recently, music majors reacted to peer to peer by framing it exclusively as acts of piracy, and as a result limiting their action to the legal option, instead of taking an open view on the undermining by the Internet of their very reason to exist on the marketplace.

More generally, enabling an organization to change with its environment requires changing its frame. The question, of course, is how to define the new frame and how to adopt it. Some researchers such as Sarah Kaplan show that this can be achieved by organizing ‘framing contests’ between different possible frames within the organization. The chosen frame will be the result of this contest, the process of which creates the conditions for the frame to be properly adopted and used. See a previous post I wrote on Framing here.

Case studies, Theory

Nespresso: when the simplicity of the product hides the complexity of the innovation process

One of my favorite questions when I teach innovation is to ask participants how long it took for Nestlé to succeed with their Nespresso coffee machine. So what’s your answer? One year? Five year? Well no. The answer is 21 years! Based on a technology licensed from the Battelle Institute by Nestlé in… 1974, Nespresso only became profitable in 1995 after much ups and downs. 21 years were needed to make a success of the Nespresso innovation.

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Best of, Case studies

Technological, economical and usage breakthroughs: the case of the VCR

If you ask someone about the origins of the video tape recorder, you will most likely get answers such as JVC, Panasonic and the VHS standard. An older audience would probably remind of Sony and the Betamax. This selective memory is quite consistent with Michael Schrage theory about innovation : “innovation isn’t what innovators do ; it’s what customers and clients adopt.” A variation could read : “People don’t remember the invention, they remember when the invention became adopted by the public.”

So those who remember JVC and those who remember Sony as inventors of the video tape recorder are both wrong. The whole story is worth telling because it provides a good illustration of the different breakthroughs which go along with an innovation.

In 1951, Charles Ginsburg, a studio and transmitter engineer at a San Francisco area radio station received a call from Alexander M. Poniatoff, founder and president of the Ampex Corporation in Redwood City, California. Mr. Poniatoff believed Ginsburg could help him with an important project. Ginsburg’s mission was to develop the first broadcast-quality videotape recorder (VTR), which he did : the Ampex VRX-1000 (later renamed the Mark IV) videotape recorder was introduced on March 1956. The machine sold for $50,000 (approximatly the equivalent of today $424,000…). It was on that year that the video tape recorder became a reality ; ie. the technological breakthrough happened more than 50 years ago.

The video tape recorder would remain a purely professional machine for the next two decades. In October 1969, Sony introduced its “Color Videoplayer”, which can be considered as the prototype for the U-matic format, introduced in Japan in September 1971. The two initial U-matic products were a video cassette player, the VP-1100, which had a price tag of 238,000 yen (approximatly the equivalent of today $2900), and a video cassette recorder (the first VCR) the VO-1700, priced at 358,000 yen (approximatly today $4,400). Not exactly mass market products.

The Betamax format was announced by Sony on April 16th 1975. The first Betamax product was the SL-7200, a VCR combined with a TV set for a price tag of $1295 (approximately today $4,200). Less than one year after, the VHS (Video Home System) format was launched by JVC. Sony’s philosophy was focused on quality, whereas JVC was focused on lowering the price. The first JVC machine, the HR-3300, was priced at the equivalent of today $3,100. I won’t expand here on the “format war” (VHS versus Betamax) as a lot has already been written on the topic, but it might be worth noticing that Betamax cassettes were limited to one hour versus four hours for the VHS format (in the US, enough for an entire football game). In October 1977, RCA launched the VHS Selecta Vision VCR in the US with a $4 million advertising campaign. By the summer of 1979, VHS was already outselling Betamax by a margin of two to one in the US.

The economic breakthrough came at the beginning of the 80s. From an average US price of $800 in 1978 (today $2,100), VCR prices went down to $426 in 1987 (today $660) ; the actualized price had been slashed by almost 70%! It is quite interesting to notice that it took 30 years for the concept of video tape recorder to shift from technological breakthrough to economical breakthrough. Not surprisingly, the usage breakthrough came along the price fall : In 1980 less than one percent of all U.S. households owned a VCR ; by 1987, this number had raised to 50%.

The VCR life span as a mass market product, however, was only approximately 25 years. In November 2004, Dixons retailer stopped selling VCR because of the ever greater success of DVD readers and recorders. Nobody use VCR anymore.

For a trip at the origins of VCR, and for the fun, visit “Total Rewind”, the virtual museum of vintage VCRs, at : http://www.totalrewind.org.

Case studies

The Failure of AT&T, Victim of a Disruption

So it’s over ; The subsidiary of Bell Telephone Company, child of Graham Bell, the 120 year-old AT&T has been sold to SBC Communications. It’s still a family story, as SBC Communications started in the mid-eighties as the smallest of the seven “baby bells”, the companies created after the regulator ordered the AT&T break-up. But what a story !

AT&T introduced many innovations, and not small ones : first commercial radio (1922), first television transmission (1927), first mobile phone (1946 !), first transistor (1947), first telecom satellite (1962). AT&T has long been a giant of the economic landscape: one million employees at the beginning of the 80s and not so long ago, a market value of $180 billions (1999).

The last numbers were much smaller : 60,000 employees and a market value down to $16 billions. Of course, you can blame it all on the settlement of the antitrust case again AT&T by the Department of Justice in 1982, which was followed by the 1984 break-up ; seven “baby bells” for local telephone services whereas AT&T kept long-distance services.

But the end of the AT&T icon is probably more related to the inability to cope with breakthroughs than pure regulatory matters, and it’s been the place for a quite unusual story : the ODD group.

ODD stood for “Opportunity Discovery Department”, and it was the 1995 brainchild of eight scientists within the famous Bell’s Labs, in Murray Hill, New Jersey. They were acutely aware of breakthroughs which obviously threatened AT&T’s strategic position, and they wanted these issues to trigger a strategic dialogue. To make things worse, AT&T’s strategy at the time was totally focused on incremental marketing targets ; the linear extrapolation of previous years curves (nowadays hopefully, there’s not a single company which operates that way…;-). But ODD scientists became aware that AT&T future would not always look like the past, and they decided to communicate about what they saw, using an ODD vocabulary.

Among the concepts they created, was the “freight train” ; a trend that is going to flatten a company unless it changes its strategy. ODDsters though the concept was especially relevant to the price of long-distance calls ; starting around $100/minute in 1915, it fell to $10 in 1945, $1 in 1970 and 10 cents in 1996. A case study of predictability of economic breakthroughs ! AT&T is gone, but freight trains are still around (talked Peer-to-Peer with a music major lately ?…)

Another striking concept was the “data bomb”. ODDsters favorite example was : “AT&T took 75 years to acquire 50 million customers; AOL took 2,5 years to acquire 50 million chat users”.

Life of ODDsters was not easy. They wanted to save the company, but AT&T didn’t like what they had to say. It became especially obvious when an unscrupulous journalist published an ODDster (David Isenberg) internal memo in Computer Telephony in August 1997. It was called “The rise of the Stupid Network” and it was meant to get the attention of AT&T management on the following mechanism : intelligent networks with stupid peripheral devices (such as telephones) were being replaced by stupid networks with intelligent devices (such as computers). Here’s an extract : “A rudimentary form of the Stupid Network – the Internet – is here today. The telephone companies are beginning to realize this. Fearing erosion of their control and, more importantly, their revenue stream, they have been quick to call for the banning of Internet Telephony, quick to call for the federal imposition of charges on Internet access, and slow to implement widely available, reasonably priced broadband services. To counter the threat of the Stupid Network, the telephone companies are now speeding deployment of the Intelligent Network services, much like sailing merchants responded to the threat of steam by inventing faster sailing ships in the mid 1800s… Instead, telephone companies should cannibalize their own products.”

David Isenberg had to leave AT&T by the end of 1997. On July 1998, the ODD group disappeared. Another perfect example of how easy it is to see breakthroughs, but how difficult it is to get companies to react in an appropriate way.

The detailed ODD story has been written by one of its former members (Amy Muller) and Liisa Välikangas (Strategos). It can be read at: http://www.strategos.com/articles/ODD_StrategyCreation.PDF

Case studies

Why FireFox stands no chance against Explorer

Let’s make a prediction; this is not so common in management, even less in innovation management where 99% of the work is post-mortem analysis, with 20/20 hindsight. There’s been a lot of talk recently, including on this blog, about the FireFox phenomenon; FireFox is the open source Internet browser developed by the Mozilla foundation, recently reborn. It is a direct challenger to Microsoft’s Internet Explorer, which until recently had more than 97% market share.

There is no objective reason to switch from Explorer to FireFox. Of course, you will be told that FireFox is faster, easier to use thanks to a good design, and, last but not least in the times of fear and uncertainty, that it is more secure and less prone to attacks by viruses and other Trojan horses. But these advantage are quite meager. I have been using FireFox for several weeks now, and frankly, I don’t see much difference with Explorer. Only marginally, except of course that several important Web sites do not support FireFox, which is obviously annoying: what is more annoying in fact for a FireFox crusader than having to launch Explorer in parallel regularly in order to visit some Web sites and do real business? Based on this, I venture to predict FireFox’s failure to dislodge Explorer.

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Case studies

Google: an innovator in danger?

Not a week passes without an article celebrating Google’s success, the poster child of the post-bubble Internet economy, the one that has survived. In a previous post, we were discussing how Googles poses a threat to mighty Microsoft with its new generation mail and search engine. In fact, Google is now much more than a superbe search engine and a very smart mail service. Google, in fact, is now a "Web system", ie a set of services designed to work together and leverage each other.

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Case studies

The Millau viaduct : behind the feat, a number of brilliant innovations

The technique of cable-stayed bridges goes back to the 18th century. But various accidents, usually the breaking of cables following wind-generated oscillations, put this technique in quarantine until the 1960s. A video to watch once again shows it: the collapse of the Tahoma Bridge in the United States in 1940. A few pictures available on http://thefilmvault.com/disasters/tahoma_bridge.html.

The Millau viaduct, opened yesterday, has been praised for a few feats. The height of its pillars for a start ; pillar #3 with 221 meters and pillar #2 with 245 meters (343 meters if you add the pylon holding the cables) shatter the previous record for the category (180 meters). The span between pillars is also remarkable : with 340 meters, the previous record (140 meters) for a metallic bridge almost looks short. But much interest lies in the various innovations generated during this exceptional roadwork.

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