Bitter Competition Take-aways The Game through 1991

Bitter Competition Take-aways

The Game through 1991 1986 • HSC begins work on 500 ton aspartame plant • HSC and Angus Fine Chemicals complain to European Commission about NS’s contracting practices • Pfizer files petition for FDA Approval of alitame 1990 1988 • Tosoh Canada files complaint against NS with Canadian Bureau of Competition Policy • Hoechst gains limited FDA approval for acesulfame-K • 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 Nutrasweet’s contracting practices • European Commission imposes antidumping duties on NS 1985 1991 1987 1985 • HSC Formed • Monsanto Acquires Searle • 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 1989 • HSC and United Sweeteners USA file suit in Delaware to declare NS’s 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

How effective a strategist has Nutra. Sweet 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. F F 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 Nutra. Sweet 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 wasn’t 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 Sweet. Mate™ 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 Nutra. Sweet to cede part of the European / Canadian market rather than initiate price war F Problem: figure out a way to commit or signal intention to staying small – HSC allowed itself to be bluffed into delaying expansion u Waited for resolution of the legal battle in Canada / Europe before installing more capacity

Decision-making about plant expansion at HSC: Was Nutra. Sweet bluffing? Analysis Logic First Level: n Small scale entry in U. S. makes accommodation Single market / preferable for Nutra. Sweet than fighting Static Second Level: n Potential profits in the future for Nutra. Sweet more Single market / than compensate for a period of low profits Dynamic Price Monopoly Level Price War n Third Level: Multi-market / Dynamic Normal Competition But can Nutra. Sweet really bring prices back up? US market is ~10 X the size of Europe / Canada n Makes sense for Nutra. Sweet to fight there if it delays HSC’s entry into the US n

How effective a strategist has HSC been so far? (2) –? Better to commit to a larger facility in the beginning? u u Sinking the capacity to enable HSC to enter the US market would have reduced Nutra. Sweet’s temptation to fight in Europe/Canada and may have deterred Nutra. Sweet from expanding. Also a larger facility would have yielded a lower cost-gap with Nutra. Sweet ? HSC’s best opportunities may lie outside the US. u There Coke, as a dominant player, may benefit more from having a second source (and suffer less from not being able to use the Nutra. Sweet 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 Nutra. Sweet 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. u u u Given NS’s brand 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 F F Demand fixed payment to enter / expand Demand a long-term contract from Coke

The Game between HSC and Nutra. Sweet played out on two levels n Tactics u n Shaping the perceptions of the other player Value u Securing added value, denying it to the other player

Nutra. Sweet’s tactical strategy n Dropped price sharply when HSC entered European and Canadian markets u Goal: shape perceptions of HSC managers about how tough competition would be in Europe and in the US F F u n Starve HSC of funds Deny HSC learning-related cost reduction opportunities Effectiveness: delayed HSC’s 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

Nutra. Sweet’s added value strategy n Investments in brand building u u n Increase end-customers’ WTP generate “pull” Decrease direct customers’ (Coke, Pepsi) willingness to gamble by switching Emphasis on cost reduction Enabled Nutra. Sweet to continue to operate profitably even after legal barriers to entry (patents) eroded.

What is HSC’s added value? n n Proprietary cost-reducing technology Primarily, HSC destroys Nutra. Sweet’s added value (and increases the added value of Cola makers) u Thinking ahead, HSC might have captured some of this by getting paid to play.

From the Where are They Now Files n 1992 -2000 n 1992: Pepsi and Coke re-sign exclusive deals to buy artificial sweetener exclusively from Nutrasweet u Holland Sweetener Company enters the U. S. market for aspartame as Nutrasweet’s patent expires 1996: u Nutrasweet turns to Tony Bennett and actress Jamie Lee Curtis to fatten its Equal brand's share of the flat $225 million artificialsweetener market u Coca-Cola blames slow growth in diet soft drink market on Nutra. Sweet u n

2000 -Present n n 2000: u Monsanto said it agree to sell its bulk Nutra. Sweet business to J. W. Childs Associates LP for $440 million. Present: u u Nutra. Sweet is still maintains its position of leadership in the artificial sweetener market. Both HSC and Nutra. Sweet continue to pursue research on nextgeneration sweeteners.

Ticket Scalping Example, Part A n n This example is courtesy of Prof. Meghan Busse. “The Producers” starts in 5 minutes Outside 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?

Ticket Scalping Example, Part B n n “The Producers” starts in 5 minutes Outside 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 n n “The Producers” starts in 5 minutes Outside 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?