Bittersweet Competition

Game 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 in 1988; no branding; customer can blend.

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

Italian firms exit; no other entrants.

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

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

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

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

Bitter Competition (1989-91)

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

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

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

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

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

HSC:“We are convinced that NS’s game plan has been to drive us out of business and then retain the mono-poly. All we have ever wanted is a level playing

field.”

Bitter Competition (mid-1991)

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

1993.

Bitter Competition (late 1991)

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

HSC has 30% of EC and 5% of Canada

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

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

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

New CEO Robt Flynn offers dedicated sales force 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 campaign for Equal (starring Cher).

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

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

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

Factors that Influence NutraSweet’s Aggressiveness

Cost in terms of lost profits Position on the experience curve

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

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

Summary Dynamics of competition

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

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

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

capture little value once it entered

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

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

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

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

Traps of Strategy

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

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

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

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

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

The importance of pre-emption

“Those who win every battle are not really skillful…

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

Sun Tse