Porter’s Five Forces is a strategic framework used to evaluate an industry’s competitive structure and its impact on profitability. First, the competitive rivalry measures the intensity of competition within an industry. High rivalry is influenced by factors such as the number of competitors, slow industry growth, undifferentiated products, insignificant brand loyalty, and high exit barriers. Secondly, barriers to entry, like product differentiation, switching costs, capital investments, and limited distribution access, can deter new entrants. Thirdly, supplier power refers to the pressure suppliers can exert on businesses through pricing, product quality, and availability. Supplier power is higher when suppliers are concentrated or can easily integrate forward, and when products are highly differentiated. Fourthly, strong buyers can increase competition and reduce seller profitability. Factors that enhance buyer power include buyer concentration, low switching costs, potential for backward integration, price sensitivity, buyer education, and available substitute products. Finally, the threat of substitute products assesses the availability of alternative products that can replace those in the industry, potentially reducing profitability. A high threat arises when consumers face low switching costs and substitutes are cheaper or offer superior quality or performance.
In the following, we highlight key points related to Nespresso’s competitive position. Nespresso faces increased competition from companies offering compatible capsules and criticism from environmental activists due to its single-use capsules. This has challenged its once-monopoly status and profitability. In response, Nespresso invests in innovation (centrifusion technology and barcode scanning system), product development, and marketing campaigns to maintain its market position and brand image. Nespresso has significant barriers to entry for new competitors. These barriers include high initial investments, adherence to industry norms and technical standards, and differentiation through an ultra-premiumisation by focusing on Grand Cru pods. Nespresso also emphasizes sustainability through the AAA Sustainable Quality Program.
Nespresso has a degree of control over its supply chain by building strong relationships with farmers through the Rainforest Alliance. The high switching costs further limit supplier power. While there are many buyers and a few sellers in the market, Nespresso increase its market share by differentiating itself from similar brands. Nespresso has created concept stores and customers are not price sensitive.
Nespresso maintains a low threat of substitutes by positioning itself as a luxury brand, offering promotions on machines, and using a “razor-and-blades” business model. Its unique selling proposition emphasizes qualities such as espresso quality, quick brewing, ease of use, sustainability, and community-building, making the perceived value exceed the price.
This diploma project was presented by DU graduate Zeina Dagher in the final oral examination.
Zeina Dagher is a Professor in environmental and occupational toxicology. With over 15 years of experience, she has a strong background in cell biology, health, and environment. She supervised 3 Ph.D. and is co-author to 1 book chapter in air pollution advances. She published 15 articles and participated in EU programs.
Here is her presentation of the diploma project: