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 Porters 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 HSCs 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 HSCs 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 Pepsis 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: NutraSweets positioning mistakes NutraSweets product mistakes NutraSweets marketing mistakes Latest technology advances NutraSweets 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.