March 20

Nespresso and the future of telecoms, part 1



Nespresso is a great story in business model innovation – but have you wondered where the telecoms equivalent of Nespresso might be? Here is one possible answer to that question.

future of telecom nespresso innovation

The story of how Nestle launched Nespresso in the context of a utilitarian, and stagnant/declining commodity coffee market, and created and dominated a new product category, is a business-school favourite.  Once, it had to be specially incubated and protected from internal sceptics who doubted the firms to commercialise such a premium offering direct to consumers, and who felt it would make only marginal difference to coffee shipments. Now it’s a $3 billion business growing at 20% per year.  What lessons can we take away for the technology and telecoms market?

Competitive advantage shifting downstream

The Nespresso innovation came from a pivot in thinking.  From the industrial revolution until now, “how can we maximise the economics of scale in our production?” has been the driving lens of strategic decision making.  This results in using the same production infrastructure (‘factory’) to churn out a variety of product variants in order to drive volume and margins.  The reason why this worked is that costs lay primarily in the factory, and they were largely fixed.

However, fixed costs have gradually been shifting away from production, as market success depends increasingly on activities such as brand-building, marketing, analytics, and distribution. These are all largely fixed costs, but customer-orientated.  At the same time, value chains have been unbundling, so that firms are able to cost-efficiently purchase production on a variable-cost basis.  The factory has become a service!  This is the strategic shift that Niraj Dawar describes so well in his article Finding the New Locus of Competitive Advantage (HBR, 2013), or in his book Tilt.

The locus of competitive advantage has shifted downstream, argues Dawar, and firms now need to give much more strategic thought to understanding customers and customer value, rather than asking how to generate more economics of scale out of their factory.

Nespresso is a great example of this thinking.  The objective was not to shift massive volumes of coffee but provide customers with the best experience at home. The customer base was the end-users, not middle-men distributors.  The investments were in customer acquisition (marketing and subsidising the coffee machines) and customer service, not in ever-more efficient production facilities.

Can telecoms firms ‘do a Nespresso’?

Should we be expecting a telecom firm to break away and ‘do a Nespresso’? The network is still a large fixed cost with low variable costs, and so driving scale on the network is important. Selling as much connectivity as possible is still the driving force of the telecoms industry.

Of course, the whole rise of ‘OTT’ (sic) Web players demonstrates what happens when production costs become variable and customer costs become large and fixed: customer-focused innovation, new product categories, and a few dominant customer brands emerge.  The Web players are the Nespressos of the high-tech world! But as the connectivity market stagnates and even declines, and as the cost of securing customers’ attention, business and loyalty rises, telecoms firms will have to ask themselves hard questions.  As I’ve said, the Google MVNO deal is one suggestion that some telcos will double-down on the production side and leave others to develop and package compelling customer experiences.

However, I think that telcos do still have some chances to ‘do a Nespresso’ and launch new customer-centric product categories.  In the next post I’ll give an example.

Where do you this biggest opportunities for telecom firms to innovate new customer value, rather than just driving more and more connectivity? Leave a comment below or on social media.

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About the author 

Richard Medcalf

Strategist, consultant and business leader with 15 years experience in helping companies thrive in an Internet world. Formerly a partner in strategy consultancy Analysys Mason; now at Cisco Systems, developing new strategic partnerships with leading telecoms players.

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Nespresso and the future of telecoms, part 2

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