Bittersweet Competition

Game Theory & StrategyGame Theory & Strategy

HSCNutraSweet

Fight$___/lb

Accommodate$___/lb

contribution margins

Pay-offs in Europe

Pay-offs in Europe

HSCNutraSweet

Fight$25/lb

Accommodate$50/lb

($25 - 25) x0 tonnes x2,205 lb/tonne) =

$0 mm

($50 - 25) x500 tonnes x2,205 lb/tonne) =

$28 mm

($50 - 18) x800 tonnes x2,205 lb/tonne) =

$56 mm

$ ($25 - 18) x1,300 tonnes x2,205 lb/tonne) =

$20 mm

contribution margins

Bitter Competition (1987-89)

1987-HSC launches; 500-tonne plant on stream 1987-HSC launches; 500-tonne plant on stream in 1988; no branding; customer can blend.in 1988; no branding; customer can blend.

Feb. 1987-NS responds to complaints by Euro-Feb. 1987-NS responds to complaints by Euro-pean commission; opens 50% of European pean commission; opens 50% of European contracts with Coke & Pepsi to competitive contracts with Coke & Pepsi to competitive bidding. Both gave HSC “some” business.bidding. Both gave HSC “some” business. NS drops price to $22-30. Angus Chemical & 3 NS drops price to $22-30. Angus Chemical & 3

Italian firms exit; no other entrants.Italian firms exit; no other entrants.

In 1981, NutraSweet in Canada was $90/lb. As In 1981, NutraSweet in Canada was $90/lb. As HSC entered, NS lowers price to $40-$50/lbHSC entered, NS lowers price to $40-$50/lb.. HSC finds that NS signed Coke & Pepsi to HSC finds that NS signed Coke & Pepsi to

exclusive, multi-yr contracts that include:exclusive, multi-yr contracts that include: ““Meet or Release” clauses -- give NS the right Meet or Release” clauses -- give NS the right

to meet any price by a competitorto meet any price by a competitor ““MFN” clauses -- NS guarantees the price MFN” clauses -- NS guarantees the price

charged to Coke/Pepsi would match the charged to Coke/Pepsi would match the lowest price to the other competitor.lowest price to the other competitor.

Bitter Competition (1989-91)

Late 1989, NS announces plan to double capacity at Late 1989, NS announces plan to double capacity at Augusta to 6,000 tonnes (1991 demand forecast: Augusta to 6,000 tonnes (1991 demand forecast: 8,000 tonnes in U.S.; 10,000 tonnes worldwide.)8,000 tonnes in U.S.; 10,000 tonnes worldwide.)

HSC lodges dumping complaint with EC; Nov. HSC lodges dumping complaint with EC; Nov. 1990, EC levies $15/lb duty on NS imports. 1990, EC levies $15/lb duty on NS imports.

HSC files complaint in Canada: “NS dropped HSC files complaint in Canada: “NS dropped prices in Canada to $23-34 and forced buyers to prices in Canada to $23-34 and forced buyers to sign exclusive contracts to drive us from the mkt.” sign exclusive contracts to drive us from the mkt.” Oct. 1990-Canadian court prohibits NS’s use of: Oct. 1990-Canadian court prohibits NS’s use of:

1) exclusive contracts, and 2) discounts in exchange for 1) exclusive contracts, and 2) discounts in exchange for exclusivity or use of the NS logo on products. exclusivity or use of the NS logo on products.

Also prohibits NS from “MOR” clauses, and requires that Also prohibits NS from “MOR” clauses, and requires that “MFN” clauses be offered to all customers or none (not “MFN” clauses be offered to all customers or none (not just Coke and Pepsi)just Coke and Pepsi)

HSC:“We are convinced that NS’s game plan has been to HSC:“We are convinced that NS’s game plan has been to drive us out of business and then retain the mono-poly. All drive us out of business and then retain the mono-poly. All

we have ever wanted is a level playing field.”we have ever wanted is a level playing field.”

Bitter Competition (mid-1991)

September 1991, NS-Ajinomoto joint September 1991, NS-Ajinomoto joint venture announces $130 million plan venture announces $130 million plan to build 2,000 tonne plant near to build 2,000 tonne plant near Dunkirk in France. Dunkirk in France. Plant will come on stream in summer of Plant will come on stream in summer of

1993.1993.

Bitter Competition (late 1991)

Worldwide demand and price:Worldwide demand and price: US: 8,000 tonnes @ $50-70/lb US: 8,000 tonnes @ $50-70/lb EC: 1,400 tonnes @ $37-40/lb (reflecting $15 duty)EC: 1,400 tonnes @ $37-40/lb (reflecting $15 duty) Canada: 400 tonnes @ $30 per lbCanada: 400 tonnes @ $30 per lb RoW: 200 tonnesRoW: 200 tonnes

HSC has 30% of EC and 5% of CanadaHSC has 30% of EC and 5% of Canada

Soft drinks = 80% of aspartame sales; Soft drinks = 80% of aspartame sales; Coke and Pepsi = 70% of soft drink marketCoke and Pepsi = 70% of soft drink market

Tabletop aspartame grows rapidly in US; NS Tabletop aspartame grows rapidly in US; NS earning 30% on $200 million with earning 30% on $200 million with Equal. Equal Equal. Equal had 54% market share; had 54% market share; Sweet’N Low Sweet’N Low had 31%.had 31%.

NS builds 25-person service/sales staff to provide NS builds 25-person service/sales staff to provide customer assistance and mkt research to customers.customer assistance and mkt research to customers.

New CEO Robt Flynn offers dedicated sales force New CEO Robt Flynn offers dedicated sales force to serve Coke/Pepsi, plans to cut mfg cost 60%.to serve Coke/Pepsi, plans to cut mfg cost 60%.

Pay-offs in the US

contribution margins

HSCNutraSweet

Fight$___/lb

Accom$___/lb

Pay-offs in the US

contribution margins

HSCNutraSweet

Fight$25/lb

Accom$50/lb

($25 - 25) x0 tonnes x2,205 lb/tonne) =

$0 mm

($50 - 25) x1,500 tonnes x2,205 lb/tonne) =

$83 mm

($50 - 17) x6,500 tonnes x2,205 lb/tonne) =

$473 mm

($25 - 17) x8,000 tonnes x2,205 lb/tonne) =

$141 mm

Pay-offs in the US

contribution margins

HSCNutraSweet

Fight$25/lb

Accom$50/lb

($25 - 25) x0 tonnes x2,205 lb/tonne) =

$0 mm

($45 - 25) x1,500 tonnes x2,205 lb/tonne) =

$66 mm

($50 - 12) x6,500 tonnes x2,205 lb/tonne) =

$545 mm

($25 - 12) x8,000 tonnes x2,205 lb/tonne) =

$229 mm

Bitter Competition (mid-1992)

February 1992, NS launches $10 million February 1992, NS launches $10 million campaign for campaign for Equal Equal (starring Cher). (starring Cher).

April 1992, Pepsi announces new long-term April 1992, Pepsi announces new long-term global supply contract with NS. Coke global supply contract with NS. Coke discloses it signed similar deal in discloses it signed similar deal in December.December.

Analysts estimated that Coke and Pepsi Analysts estimated that Coke and Pepsi would save $200 million per year over next would save $200 million per year over next 2-3 years, as prices drop to “low $30s” / lb.2-3 years, as prices drop to “low $30s” / lb.

Coke announces it has a worldwide Coke announces it has a worldwide agreement with HSC as well as NS. agreement with HSC as well as NS. Analysis indicates that it is for a very small Analysis indicates that it is for a very small volume.volume.

Factors that Influence Factors that Influence NutraSweet’s AggressivenessNutraSweet’s Aggressiveness

Cost in terms of lost profitsCost in terms of lost profits Position on the experience curve Position on the experience curve

(relative cost position).(relative cost position). Signaling to other potential entrantsSignaling to other potential entrants Patents (strength of patents)Patents (strength of patents) Timing of incumbent introducing a Timing of incumbent introducing a

next generation product (if it will be next generation product (if it will be soon, less likely to be aggressive).soon, less likely to be aggressive).

Summary Dynamics of competitionDynamics of competition

Allocentrism vs. egocentrism (understand how your Allocentrism vs. egocentrism (understand how your actions affect the value net)actions affect the value net)

NS acted aggressively in Europe/Canada where it had NS acted aggressively in Europe/Canada where it had little to lose (develop tough reputation). NS little to lose (develop tough reputation). NS accommodates small HSC entry in U.S.accommodates small HSC entry in U.S.

Once it entered, HSC had no added valueOnce it entered, HSC had no added value Since HSC added no value, it could expect to capture Since HSC added no value, it could expect to capture

little value once it enteredlittle value once it entered

HSC’s entry substantially changed the HSC’s entry substantially changed the divisiondivision of of value, however -- ivalue, however -- in favor of Coke and Pepsin favor of Coke and Pepsi

If your entry shifts the division of value but creates If your entry shifts the division of value but creates no new value, GET PAID TO PLAY!!!no new value, GET PAID TO PLAY!!! As a provider of aspartame, HSC was a weak second As a provider of aspartame, HSC was a weak second

player. As a provider of competition in the market for player. As a provider of competition in the market for aspartame, HSC was a monopolistaspartame, HSC was a monopolist

Know your effect on the creation and division of Know your effect on the creation and division of value, and exploit it!!!value, and exploit it!!!

Traps of Strategy

Thinking that your win must come at the Thinking that your win must come at the expense of other players.expense of other players.

Believing that you must do something Believing that you must do something others can’t do.others can’t do.

Failing to see the whole game—the Failing to see the whole game—the interactions of actions/reactions of all interactions of actions/reactions of all players in the value net.players in the value net.

Failing to think systematically about Failing to think systematically about changing the game; influencing the actions changing the game; influencing the actions of other players.of other players.

There are no silver bullets for changing the There are no silver bullets for changing the game…there is no end to the game of game…there is no end to the game of changing the game.changing the game.

The importance of pre-emption

““Those who win every battle are Those who win every battle are not really skillful…not really skillful…

Those who render others’ armies Those who render others’ armies helpless without fighting are the helpless without fighting are the best of all”best of all”

Sun TseSun Tse