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Bitter Competition


HSC begins work on 500 ton aspartame plant. HSC and Angus Fine Chemicals ... to Tony Bennett and actress Jamie Lee Curtis to fatten its Equal brand's share ... – PowerPoint PPT presentation

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Title: Bitter Competition

Bitter Competition
  • Jonathan Leonard

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
  • Pfizer files petition for FDA Approval of
  • 1988
  • Tosoh Canada files complaint againstNS with
    Canadian Bureau of Competition Policy
  • Hoechst gains limited FDA approval for

  • 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

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

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

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.

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
  • Waited for resolution of the legal battle in
    Canada / Europe before installing more capacity

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

HSC Decides to Expand Capacity Was
NutraSweet bluffing?
How effective a strategist was HSC?
  • ? Better to commit to a larger facility in the
  • 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
  • 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)

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.

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

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

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
  • Starve HSC of funds
  • Deny HSC learning-related cost reduction
  • Effectiveness delayed HSCs entry into US
  • In games of this sort, the effectiveness of
  • moves depends on how opponents interpret them.

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.

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.

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.

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?

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.
Somebody read the case
  • 1991

What is added value?
Source Brandenberger and Nalebuff (1996),
Co-Opetition, p. 45
HSC Did not Get the Last Slide
  • Nada
  • Zilch
  • Zip
  • Not at all

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.

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

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

  • 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

2 Weeks Ago
    03/30/2006 --
  • Holland Sweetener Company VoF (HSC) today
    announced its decision to exit from aspartame
  • 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

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.
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?

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?

Selling a House?
  • List at Market vs.
  • List below Market

  • How much is that other bidder worth to the

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)

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.