Bitter Competition

1
Bitter Competition

• Jonathan Leonard

2
The Game Through 1991

• 1990
• HSC lodges dumping complaint against NS with
  European Commission
• Hoechst files petition for FDA approval for use
  of acesulfame-K in soft drinks
• Canadian Competition Tribunal disallows certain
  of Nutrasweets contracting practices
• European Commission imposes anti-dumping duties
  on NS

• 1986
• HSC begins work on 500 ton aspartame plant
• HSC and Angus Fine Chemicals complain to
  European Commission about NSs contracting
  practices
• Pfizer files petition for FDA Approval of
  alitame

• 1988
• Tosoh Canada files complaint againstNS with
  Canadian Bureau of Competition Policy
• Hoechst gains limited FDA approval for
  acesulfame-K

1985
1991

• 1985
• HSC Formed
• Monsanto AcquiresSearle

• 1987
• European Canadian use patents expire
• NS drops exclusivity clauses in European
  contracts with Coke Pepsi
• HSC begins selling aspartame out of pilot plant
• Miwon (South Korea) announces plans to enter
• JJ files petition for FDA approval of sucralose
• Tosoh announces plans to import HSC aspartame
  into Japan

• 1989
• HSC and United Sweeteners USA file suit in
  Delaware to declare NSs patents invalid
• NS announces plans to double annual capacity in
  Augusta plant

• 1991
• NS Ajinomoto announce plans to build 2,000 ton
  plant in Gravelines, France

3
What Happened?

• 1985 HSC formed. Monsanto buys Searle
• 1986 HSC starts 500 tonne plant
• 1987 NS patents expire in EU and Canada. HSC
  begins selling out of pilot plant.
• 1989 NS announces capacity doubling in Augusta
• 1991 NS-Ajinomoto 2000 tonne Gravelines FR plant

4
How effective a strategist was NutraSweet?

• Branded ingredient and cost reduction
  strategies, pursued in advance of patent
  expiration, generated a significant competitive
  edge over any future competitors
• Decision to fight in Europe / Canada seemed to
  be effective.
• No lasting entry by a third player
• Although prices have fallen, with a third player
  they may have fallen more
• May have deterred HSC from expanding capacity
  sooner

5
How effective a strategist was NutraSweet?

• Building a plant in Europe early on could have
  been a more effective deterrent against entry
  there, since anti-dumping duties could not have
  been imposed
• ? Given that a European plant wasnt built
  pre-1987, the decision to build one there later
  effectively eliminated any chance of reaching an
  implicit agreement with HSC to develop separate
  spheres of influence
• The launch of SweetMate seems likely to
  trigger an expensive reshuffling of market share
  in the tabletop segment. Possible additional
  impact of cannibalizing Equal sales.

6
How effective a strategist was HSC?

• ? Small-scale entry may have created an
  incentive for NutraSweet to cede part of the
  European / Canadian market rather than initiate
  price war
• Problem couldnt credibly commit to stay small
• HSC allowed itself to be bluffed into delaying
  expansion
• Waited for resolution of the legal battle in
  Canada / Europe before installing more capacity

7
Deterrence is a costly investment.

• So wheres the return?
• Out-years? Depends on discount rate, substitutes,
  threat of future entry.
• Other markets?

8
HSC Decides to Expand Capacity Was
NutraSweet bluffing?
9
How effective a strategist was HSC?

• ? Better to commit to a larger facility in the
  beginning?
• Sinking the capacity to enable HSC to enter the
  US market would have reduced NutraSweets
  temptation to fight in Europe/Canada and may have
  deterred NutraSweet from expanding.
• Also a larger facility would have yielded a lower
  cost-gap with NutraSweet
• ? HSCs best opportunities may lie outside the
  US.
• There Coke, as a dominant player, may benefit
  more from having a second source (and suffer less
  from not being able to use the NutraSweet brand)

10
Dont Chase Them Down Their Learning Curve

• Unit costs fall with cumulative output.
• They start out ahead.
• Their costs are lower.
• When theyre ahead the view is not pretty.
• Youre bleeding. Their costs are still lower.
• Change the game.

11
How effective a strategist was HSC?

• ? HSC seems poised to shift the game over time
  to cost, where they possibly can gain an edge
  over NutraSweet with HSCs patented enantiomer
  separation process
• HSC should have viewed itself as selling
  competition offering a bargaining chip to Coke
  and Pepsirather than aspartame.
• Given NSs brand and cost advantages, HSC is a
  duopolist in a weak position when it comes to
  selling aspartame
• However as the last hold-out in the aspartame
  business, HSC is in a strong position when it
  comes to selling competition
• Challenge get paid to play
• Demand fixed payment to enter / expand
• Demand a long-term contract from Coke

12
The Game between HSC and NutraSweet played out on
two levels

• Tactics
• Shaping the perceptions of the other player
• Value
• Securing added value, denying it to the other
  player

13
NutraSweets tactical strategy

• Dropped price sharply when HSC entered European
  and Canadian markets
• Goal shape perceptions of HSC managers about how
  tough competition would be in Europe and in the
  US
• Starve HSC of funds
• Deny HSC learning-related cost reduction
  opportunities
• Effectiveness delayed HSCs entry into US
  market
• In games of this sort, the effectiveness of
  tactical
• moves depends on how opponents interpret them.

14
Nutrasweets Tactics to Change the Game with Colas

• Most Favored Nation Clause NS raises its own
  cost of selective price cuts to Coke and Pepsi.
• Eliminates any chance that Coke or Pepsi can gain
  a competitive advantage against the other by
  squeezing NS.

15
Nutrasweets Tactics to Change the Game

• Meet or Release Clause Turns Coke and Pepsi into
  Agents Providing NS with Competitive
  Intelligence. Guarantees HSC will only get as
  much of this market as NS decides to give them.

16
Nutrasweets Tactics to Change the Game

• Long Term Contracts
• Could be breached at a substantial cost. So tells
  HSC a small cost advantage wont be enough to get
  Coke and Pepsi to breach.

17
The (Flexible) Bit Players Exit

• Reduce Risk Reduce Reward
• Farmitalia, Montedison, Pierrel all built more
  costly multi-purpose flexible plants.
• High salvage value Low barrier to exit low
  commitment to market.
• They did not burn the bridges behind them.
• All bail out. Predictably.
• How easy is it to force a rival out in Mkt. D?

18
NutraSweets deeper strategy to add value

• Invest in building brand
• Increase end-customers WTP ? generate pull
• Decrease direct customers (Coke, Pepsi)
  willingness to gamble by switching
• Reduce costs

Great setup enables NutraSweet to continue to
profit even after legal barriers to entry
(patents) expire.
19
Somebody read the case

• 1991

20
What is added value?
Source Brandenberger and Nalebuff (1996),
Co-Opetition, p. 45
21
HSC Did not Get the Last Slide

• Nada
• Zilch
• Zip
• Not at all

22
What is HSCs added value?

• Proprietary cost-reducing technology
• HSC Rivalry reduces NutraSweets added value (and
  reduces the Cola makers costs)
• Thinking ahead, HSC might have captured some of
  this by getting paid to play.

23
But

• They didnt
• and
• It cost them
• big time

24
Where are They Now?

• 1992
• Pepsi and Coke re-sign exclusive deals to buy
  artificial sweetener exclusively from Nutrasweet
• Holland Sweetener Company enters the U.S. market
  for aspartame as Nutrasweets patent expires
• 1996
• Nutrasweet turns to Tony Bennett and actress
  Jamie Lee Curtis to fatten its Equal brand's
  share of the flat 225 million artificial-sweetene
  r market
• Coca-Cola blames slow growth in diet soft drink
  market on NutraSweet

25
2000-Present

• 2000
• Monsanto sells its bulk NutraSweet business to J.
  W. Childs Associates LP for 440 million.
• Present
• NutraSweet still maintains its position of
  leadership in the artificial sweetener market.
• Continuing Research on next generation Sweeteners

26
2 Weeks Ago

• HEERLEN, NETHERLANDS -- (MARKET WIRE) --
  03/30/2006 --
• Holland Sweetener Company VoF (HSC) today
  announced its decision to exit from aspartame
  business.
• The global aspartame markets are facing
  structural oversupply, which has caused worldwide
  price erosion over the last 5 years. This has
  resulted in a persistently unprofitable business
  position for HSC. No significant improvements are
  expected in the foreseeable future. The decision
  to withdraw from this business is in line with
  DSM's Vision 2010 - strategy, in which profitable
  innovative growth and value creation are key
  objectives. (As opposed to what?)
• DSM does not expect the decision to have a
  material impact on its overall corporate
  financial performance in 2006. In Q1 2006 DSM
  will - in relation to this decision- record an
  exceptional item of approximately EUR 10 million
  net.

27
Ticket Scalping Example, Part A

• The Producers starts in 5 minutes
• Outside the theater, there are two scalpers with
  two tickets each
• Five people who want to attend the play, each
  willing to pay 100
• What do you expect will happen?

This example is courtesy of Prof. Meghan Busse.
28
Ticket Scalping Example,Part B

• The Producers starts in 5 minutes
• Outside the theater, there are two scalpers with
  two tickets each
• Four people who want to attend the play, each
  willing to pay 100
• What do you expect will happen?

29
Ticket Scalping Example, Part C

• The Producers starts in 5 minutes
• Outside the theater, there are two scalpers with
  two tickets each
• Three people who want to attend the play, each
  willing to pay 100
• What do you expect will happen?

30
Selling a House?

• List at Market vs.
• List below Market

31
E-Bay

• How much is that other bidder worth to the
  seller?

32
LIN Broadcasting, McCaw, and Bellsouth
the Un-HSC

• 5.4B Lin Market value
• McCaw offers 4.3 buy-out premium 5.6B
• Lin pays BellSouth 54M expenses to bid.
• McCaw raises to 6.3B, and pays BellSouth 76.5M
  to exit.
• BellSouth recognized who stood to gain from its
  entry and exit, and extracted payments for both.
  
• Real Sweet Investment by Lin (10x return)

33
Before you go to work

• Better know who youre working for and what game
  they are in.
• Negotiate for a share of the value you add to
  their game.