Question 1

The Holland Sweetener Company (HSC) prepared itself to enter the European and Canadian Aspartame

Markets in late 1986. NutraSweet however had a majority market share in this region. This would be

then considered by one of the Porter’s Five Forces as a threat of the entry of a new competitor.

Profitable markets that yield high returns such as the Aspartame market would sooner or later attract new

firms. This would result in having HSC as a new entrant, which eventually will decrease profitability for

NutraSweet in the industry. Unless the entry of HSC can be blocked by incumbents, the abnormal profit

rate will tend towards zero i.e. perfect competition.

The existence of barriers to entry such as patents, rights, etc. can make it harder for the new competitor to

penetrate the market.

Factors that count towards market penetration:

Economies of product differences

Brand equity of HSC

Switching costs or sunk costs

Capital requirements

Access to distribution

Existing customer loyalty to NutraSweet

Absolute cost

Aspartame was a new-to-the-world product. The aspartame market also being highly lucrative and

profitable should be more than a sufficient reason for HSC to want to be a new competitor in the market

and give NutraSweet a run for their money.

Naturally, NutraSweet would not be happy with the presence of this new competitor as they would have

to fight for their current market share and to cling on to their current customers.

Normal Competition

NutraSweet has the advantage of deciding what to do upon HSC’s entry. This is simply because they have

the first choice of the market segment and position. Hence, there is no need for them to respond with

aggressive price wars via price slashing schemes.

They are able to promote attributes that favour their form of Aspartame as compared to the generic

version HSC manufacture. Contract renewals with leading soft drinks companies like Pepsi and Coke

could be established in that manner. Given that NutraSweet already has contracts with them, they then

become a standard of reference in regards to other potential buyers and consumers who are interested in

artificial sweeteners. They are able to define the rules of the game since they have the distribution

advantage and that distributors may be reluctant to take on more than one brand.

Additional points that enable NutraSweet to not react to HSC’s decision to enter:

Economies of scale and experience in the market

High switching cost

Network effect

Pre-empting scarce resources

Additionally, sometimes an analysis of the market reveals that several customer segments exhibit

different degrees of sensitivity to price and quality. Understanding the basis for certain customers' price

sensitivities lets managers creatively respond to a rival's price cut without cutting their own prices. For

example, a company might be able to focus on quality, not price. That being said, NutraSweet is already

well established and could then concentrate more on quality control for their Aspartame as opposed to its

going rate with current buyers.

Second, a price-cutting company develops a reputation for being low-priced, and this reputation may cast

doubt on the quality and image of other products under the umbrella brand and on the quality of future

products from Searle.

As an example, the Canadian market had two suppliers of aspartame: NutraSweet and Tosoh Canada Ltd.

This second producer had already incurred the sunk costs necessary to enter the market. The firms

competed through price offers to prospective clients. Tosoh complained that it was excluded from

supplying Coca-Cola and Pepsi in Canada because NutraSweet threatened to cease supplying those two

companies in the United States unless their worldwide demand for aspartame was met through

NutraSweet. Finally, the contracts negotiated with the large buyers did not specify a simple uniform price.

Rather, buyers contracted for fixed deliveries at agreed prices and then held options to purchase

additional amounts at a second price (Mathewson, Winter 1997).

Price Wars

In the battle to capture consumers, companies would attempt to use a wide range of tactics to ward off

competitors. Increasingly, price is the weapon of choice, frequently the skirmishing degenerates into a

price war.

Creating low price appeal is often the goal, but the result of one retaliatory price slashing after another is

often a precipitous decline in industry profits. Price wars can create economically devastating and

psychologically debilitating situations that take an extraordinary toll on an individual, a company, and

industry profitability. No matter whoever wins, the combatants all seem to end up worse off than before

they joined the battle. And yet, price wars are become increasingly common and uncommonly fierce.

If HSC enters the Aspartame market to vie for Coke and Pepsi’s business and compete with NutraSweet,

Coke and Pepsi would probably be willing to pay HSC to go ahead and penetrate the market so that the

soft drink manufacturers can drive a better deal with NutraSweet despite their loyalty and contracts with

their supplier.

Successful pioneers in the Aspartame market such as NutraSweet have the following advantages backing

them up whilst pursuing a price war:

Large entry scale

High product quality

Heavy promotional expenditure

Where else HSC would have an advantage given the following:

Larger entry scale than NutraSweet.

Surpassing NutraSweet with:

superior technology

product quality

customer service

These are points to be noted at the time given that HSC began work on a 500 tonne aspartame plant in

Geleen in February 1986 with the aim of challenging NutraSweet in Europe and Canada once their 1987

patents expired.

Question 2

A price war is defined as a fierce competition in which retailers cut prices in order to increase their share

of the market.

An aggressive price war initiated by NutraSweet could affect the market in a positive manner too.

NutraSweet would be then be able to aim to be the sole provider of Aspartame once again given that they

provide both a good price and quality of their product. Their market share would also be maintained in

this manner. In this case, HSC would end up being beaten out of the market by default.

This however could drastically change should they gain the ability to take advantage of the following key

points:

NutraSweet’s positioning mistakes

NutraSweet’s product mistakes

NutraSweet’s marketing mistakes

Latest technology advances

NutraSweet’s limited resources

More problematic is the challenge of becoming and staying the low-cost producer of aspartame when its

culture has been oriented more toward start-ups, new product innovation, and market positioning. It is a

change in mind set which some managers have had difficulty making, but must be constantly reinforced.

Again, a Shapiro comment illustrates the message: "We've now got to get the machine guns pointed down

the hill, not up the hill." Vivid, symbolic communication and behaviour is a norm (McCann 1991).

A related weapon that companies can use to avert or battle a price war is to emphasize other negative

consequences. The NutraSweet company can employ this strategy when faced with the expiration of its

patent. The company would probably fear considerable price pressure from the producers of aspartame,

the generic version of NutraSweet. A worst-case scenario would involve one of NutraSweet's major

customers, such as Coca-Cola or Pepsi, switching to aspartame provided by HSC.

Given the size of the market for carbonated soft drinks, NutraSweet's brand equity in the diet-conscious

segment, and the potential short-term loss in market share and profits, this threat seems potentially lethal.

NutraSweet should probably successfully play one customer against another, emphasizing dire and

unpalatable consequences, and thus avert a debilitating price war.

References

McCann, JE 1991, 'Design principles for an innovating company', Executive (19389779), 5, 2, pp. 76-93,

Health Business Elite, EBSCOhost, viewed 11 September 2011.

Mathewson, F, & Winter, R 1997, 'Tying as a Response to Demand Uncertainty', RAND Journal of

Economics, 28, 3, pp. 566-583, EconLit with Full Text, EBSCOhost, viewed 11 September 2011.