Bitter Competition

Take-aways
The Game through 1991
1985 1991
1985
HSC Formed
Monsanto
Acquires
Searle
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
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
J&J files petition for FDA approval of sucralose
Tosoh announces plans to import HSC
aspartame into Japan
1988
Tosoh Canada files
complaint against
NS with Canadian Bureau of
Competition Policy
Hoechst gains limited FDA
approval for acesulfame-K
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
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
1991
NS Ajinomoto
announce plans to build
2,000 ton plant in
Gravelines, France
How effective a strategist has NutraSweet been
so far?
+ 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


How effective a strategist has NutraSweet been
so far? (2)
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
reducing 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 has HSC been so far?
+ Small-scale entry created an incentive for NutraSweet
to cede part of the European / Canadian market rather
than initiate price war
Problem: figure out a way to commit or signal intention to staying small

HSC allowed itself to be bluffed into delaying
expansion
Waited for resolution of the legal battle in Canada / Europe
before installing more capacity
Decision-making about plant expansion at HSC:
Was NutraSweet bluffing?
Analysis Logic
First Level:
Single market /
Static
Small scale entry in U.S. makes accommodation
preferable for NutraSweet than fighting
Second Level:
Single market /
Dynamic

Potential profits in the future for NutraSweet more
than compensate for a period of low profits



But can NutraSweet really bring prices back up?
Third Level:
Multi-market /
Dynamic
US market is ~10X the size of Europe / Canada
Makes sense for NutraSweet to fight there if it
delays HSCs entry into the US
Price
Monopoly
Level
Price War
Normal Competition
How effective a strategist has HSC been so far?
(2)
? 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)
How effective a strategist has HSC been so far?
(3)
+ HSC seems poised to shift the game over time to cost,
where they may have an edge over NutraSweet
through their patented enantiomer separation process

+ HSC should have viewed itself as selling competition
offering a bargaining chip to Coke and Pepsi
rather 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 player

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.
Psychology Matters !
What is added value?
YOUR ADDED VALUE =

Size of the Pie When Your Are IN the Game

Minus

Size of the Pie When Your Are OUT of the Game
Source: Brandenberger and Nalebuff (1996), Co-Opetition, p. 45
NutraSweets added value strategy
Investments in brand building
Increase end-customers WTP generate pull
Decrease direct customers (Coke, Pepsi) willingness to
gamble by switching
Emphasis on cost reduction


Enabled NutraSweet to continue to operate profitably
even after legal barriers to entry (patents) eroded.
What is HSCs added value?
Proprietary cost-reducing technology

Primarily, HSC destroys NutraSweets added value
(and increases the added value of Cola makers)
Thinking ahead, HSC might have captured some of this by
getting paid to play.
From the Where are They Now Files
1992-2000
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-
sweetener market
Coca-Cola blames slow growth in diet soft drink market on
NutraSweet
2000-Present
2000:
Monsanto said it agree to sell its bulk NutraSweet business to
J. W. Childs Associates LP for $440 million.
Present:
NutraSweet is still maintains its position of leadership in the artificial
sweetener market.
Both HSC and NutraSweet continue to pursue research on next-
generation sweeteners.
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?