Semester Two Final Examinations, 2018 MGTS1301 Introduction to Management
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This exam paper must not be removed from the venue


School of Business
EXAMINATION
Semester Two Final Examinations, 2018
MGTS1301 Introduction to Management
This paper is for St Lucia Campus students.
Examination Duration: 120 minutes
Reading Time: 10 minutes
Exam Conditions:
This is a Central Examination
This is a Closed Book Examination - specified materials permitted
During reading time - write only on the rough paper provided
This examination paper will be released to the Library
Materials Permitted In The Exam Venue:
(No electronic aids are permitted e.g. laptops, phones)
An unmarked Bilingual dictionary is permitted
Materials To Be Supplied To Students:
1 x 14-Page Answer Booklet
Instructions To Students:
Additional exam materials (eg. answer booklets, rough paper) will be
provided upon request.
The exam has two parts.
Part A has 3 questions and students must answer all 3 questions.
Part B has 2 questions and students must answer both of these questions.
The exam is marked out of 50 marks and is weighted at 50% of the final mark
for the course.
Venue ____________________
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Semester Two Final Examinations, 2018 MGTS1301 Introduction to Management
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PART A
Please answer the following THREE (3) questions. Start each question on a new
page. Be sure to provide detailed answers for each question that incorporate
appropriate course theory. You may use diagrams in your answers. Each question
is worth 10 marks. In total, this section is worth 30% of your final grade.

Question 1. Leadership
Management scholars distinguish between management and leadership.

Use leadership theory to explain the difference between management and
leadership including the sources of power that underpin them. Use examples to
justify your answer. (10 marks)


Question 2. Innovation and Change
According to Lewin, the process of change management involves three phases:
Unfreezing, changing and freezing.
Describe each of these phases. Use examples to justify your answer. (10 marks)


Question 3. Managing in the Global Environment

You are a manager at an Australian beverage company and plan to expand into China
using one of the four strategies for international operations (i.e. globalisation,
transnational, multi-domestic and export). Your company currently sells freshly made
juices through a chain of juice bars, as well as pre-packaged juices through
supermarkets.
Select, describe and justify the strategy for international operations that you
believe your company should adopt. Be sure to describe the other strategies for
international operations and justify why you believe they are less appropriate. (10
marks)

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PART B
Read the Nespresso case study and answer the following TWO (2) questions. Start
each question on a new page. Be sure to provide detailed answers for each
question that incorporate appropriate course theory.
Each question is worth 10 marks. In total, this section is worth 20% of your final
grade.

Question 4. Environment and Corporate Culture
Nestlé has achieved success with the Nespresso product line because it has been able
to respond to its external environment.
Do you agree or disagree with this statement? Support your answer with
reference to relevant course theory and information from the case study. (10
marks)

Question 5. Strategy Formulation and Implementation
When it comes to the Nespresso product line, Nestlé is better at formulating strategy
than implementing strategy.
Do you agree or disagree with this statement? Support your answer with
reference to relevant course theory and information from the case study. (10
marks)

Case Study: Nespresso
Nespresso is the brand name of a coffee brewing system developed in the late 1970s by
Nestlé, the multinational food company founded and headquartered in Switzerland.
Nespresso allows consumers to brew high-quality coffee at the push of a button by
placing hermetically sealed, aluminium covered, coffee capsules into a specially
designed machine. While the idea sounds simple, the technology behind Nespresso is, in
fact, complex because it requires air and water to be passed through ground coffee at
the right temperature and pressure. At the time of its development, Nespresso
constituted a major departure for Nestlé from its core operations that were based on the
large-scale production and mass marketing of food products. In the late 1970s Nestlé’s
presence in the coffee market centred on instant coffees with products like Nescafé
accounting for 80 per cent of its revenue from coffee sales.
Early development
The original technology underpinning Nespresso was developed by the Battelle Institute,
an independent research organisation based in Geneva, but Nestlé acquired the rights to
develop the idea commercially in 1974 and went on to file a large number of patents on
the product. Camillo Pagano, who was at that time the senior executive in charge, felt
that the product had potential despite the fact that sales in the coffee market were
sluggish. At the time, the gourmet coffee market was beginning to expand and Nestlé
saw Nespresso as a vehicle by which it could expand coffee sales by moving into the
restaurant market. Many of Pagano’s colleagues were sceptical about the innovation,
questioning whether Nespresso could be commercialised and expressing concern about
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the amount of time and effort that would be taken up in launching such a niche product
that had a poor fit with Nestlé’s mainstream operations. Pagano felt that in order to
flourish the Nespresso project needed to be taken outside of Nestlé’s day-to-day
operations so, in 1984, he established Nespresso as a separate company (100 per cent
owned by Nestlé) which was free to develop its own marketing, operations and personnel
policies.
Nespresso developed its system in conjunction with a number of partners: it collaborated
with a Swiss company to improve the design of the machines; it licensed the
manufacture of the machines to Turmix, a Swiss domestic appliance manufacturer; it
partnered with Sobal, a distributor, to sell the product to end-users. The Nespresso
system was launched in 1986 in Italy, Switzerland and Japan but the product flopped. By
the end of 1987, only half the machines that had been manufactured had been sold and
without sales of machines there could be no sales of the specially designed capsules. It
looked very likely that Nestlé headquarters would kill off the project but it was decided to
give it a further chance by bringing in an outsider to see whether a turnaround could be
achieved. The person selected for this role was Jean-Paul Gaillard, a former executive
with Philip Morris, the tobacco company.
The turnaround
Rupert Gasser, head of research at Nestlé, described Gaillard as ‘ambitious and strong
headed. He wanted to do something outstanding. [Gaillard] had personality; he was a
force. And importantly, he did not carry all the trappings of the company history.’ Gaillard
made a number of changes, the most important of which were as follows.
• Changing the customer focus. Gaillard reasoned that the Nespresso system was
more suited to the household than the restaurant market. Although his intuition
was not supported by explicit market research, market trends in the late 1980s
pointed in that direction. Gaillard’s strategy was to target high-income households
and, in line with that strategy, he sought to ensure that the coffee machines were
retailed through high-end stores.

• Establishing a direct channel to the end-users through the establishment of
Nespresso Clubs. Selling Nespresso coffee capsules through supermarkets did
not fit well with the exclusive brand image Gaillard wished to create, and so he
had the idea of establishing the Nespresso Club. When households bought a
machine, they automatically became members of the Club that offered around-
the-clock ordering of coffee capsules, prompt delivery of orders and advice on
coffee making and machine maintenance. The Club had the additional advantage
of providing the company with up-to-date customer information.

• Positioning the brand at the top end of the market. The company developed
partnerships with kitchen appliance makers such as Alessi, Krups, Magimix and
Philips to produce well-designed machines sold through upmarket retail outlets.
By the time Gaillard left Nespresso in 1996, sales had taken off and there were 220 000
club members across Europe.
After Gaillard’s departure, Nespresso continued to grow as it expanded geographically,
extending its target market into small offices and businesses, while widening its range of
coffee capsules. The range of machines was increased to offer a number of
sophisticated design options and the company opened a number of retail outlets –
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Nespresso boutiques – that sold coffee-related paraphernalia as well as the Nespresso
system. Augmenting a marketing campaign that relied heavily on social media,
Nespresso launched a long-running and successful television and billboard advertising
campaign featuring George Clooney to further promote the product. By 2014, Nespresso
had estimated annual sales of SFr 4 billion (A$5.3 billion), margins on earnings before
interest and tax (most of which came from pods rather than machines) of more than 30
per cent and accounted for around 8 per cent of Nestlé’s total operating profit.
More recent challenges
As might be expected, the success of Nespresso paved the way for new competitors to
enter the market. Despite having more than 1700 patents on Nespresso capsules and
machinery, more than 20 years had elapsed since the product was first developed and
early patents were beginning to expire. In addition, the product had proved relatively
simple for new players to re-engineer without infringing Nestlé’s patents. Nonetheless,
Nestlé had built a strong brand and was the global market leader in 2014 (Table 6.4). In
the US however, Keurig Green Mountain and its Keurig K-Cup system dominated the
market, along with several other players, including both Starbucks and Walmart. In 2014,
Nespresso launched its Vertuo-Line range designed to make the larger coffee servings
preferred by Americans.
Table 1 Suppliers of single-serve coffee systems
Parent company Brand Estimated global market share in 2014 (%)
Nestlé Nespresso 35
Sara Lee Senseo 18
Keurig Green
Mountain
Keurig (K-Cup
System)
8
Kraft Tassimo 8

The bulk of the profit from single-serve pod coffee makers came from selling capsules
rather than the machines themselves and this opened up a second route for new
entrants. A number of companies, including one set up by Nespresso’s former head,
John-Paul Galliard, started selling substitute coffee pods for Nespresso machines. Nestlé
robustly defended its property rights but in a landmark case in 2013 the UK High Court
ruled that Dualit, a UK manufacturer of small domestic appliances, had not infringed
Nestlé’s patents by making substitute capsules for its Nespresso regime. Similar rulings
followed in test cases in other European countries with significant repercussions for the
viability of Nespresso’s business model.
Nespresso and other makers of pod coffee machines also found themselves under
increasing pressure from environmental campaigners, who highlighted the fact that
capsules were difficult to recycle and added to waste and environmental damage.
Nespresso launched a recycling campaign allowing consumers to return the single-use
aluminium containers in special bags but this did little to dampen criticism.

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