Case FactsThe low-calorie, high-intensity sweetening dominated by NutraSweet, the operating entity of G.D.Searle & A ; Co. NutraSweet had recorded gross revenues of $ 711 million in 1986. NutraSweet has monopoly in the market owing to the patents which are about to run out in 1987 in the European and Canadian markets The Holland Sweetener Company ( HSC ) , a joint venture between Tosoh Corporation and DSM, fixing to come in these markets with low cost patented procedure for fabricating aspartame NutraSweet fabrication involved high investing as minimal 2000-tonne one-year capacity apparatus required for efficient production In 1986, HSC began puting up a 500-tonne aspartame production works in Europe NutraSweet adopted “branded ingredient” scheme to market aspartame to nutrient and drink makers, and offered price reductions of up to 40 % off the list monetary values to go sole worldwide supplier The soft drink market in U.S. , dominated by Coca-Cola and Pepsi, accounted for 80 % gross of NutraSweet.
Rest 20 % accounted for by tabletop sweetenings, and other nutrient and drink merchandises NutraSweet AG, a joint venture between NutraSweet and Ajinomoto, had 60 % of soft drink market in Europe ( Coca Cola- 50 % , Pepsi-10 % ) NutraSweet has sole, multi-year contracts with Pepsi and Coke, and HSC is be aftering to lodge a ailment with the EC, claiming contracts to be anti-competitive Several other high strength sweetenings poised to come in U.S. and European markets in the coming old ages The tendency of intermixing expected to beef up as it has received consent from research workers and wellness governments Winfried Vermijis, president of HSC, sing two strategies- “normal competition” and “price war” for come ining the Canadian and European markets Porter’s 5-Forces Analysis
Industry under consideration- Aspartame market in Europe and Canada 1. Menace of New EntrantsBarriers to EntryIncumbency advantage- NutraSweet has patents for aspartame in U.S. , Canada and Europe and therefore has monopoly in the market Exclusive, multi-year contracts of NutraSweet with Pepsi and Coca-Cola, which form 60 % of soft drink industry Switch overing costs expected to be low because it is a trade good merchandise Capital intensive industry and the works had to be run at or near to plan capacity Capacity enlargement requires lumpy incremental investings
Need to develop new procedure for fabrication as the current procedures are patented Threat of revenge from officeholder is high- officeholder is expected to cut monetary values 2. Dickering power of Suppliers
Low power of providers as the two chemicals required are easy available 3. Dickering power of BuyersFor soft drinks market, low power of purchasers as NutraSweet has monopoly and they are bear downing a premium Expected that dickering power of purchasers will travel up one time the patent gets expired and new participants will come in 4. Menace of replacements
New high strength sweetenings have submitted requests for FDA blessing and expected to come in the sugar replacement market The new merchandises have an advantage as they are heat stable which is absent in aspartame 5. Rivalry among bing rivals
Presently, no competition in the industry as it is monopolized by NutraSweet because of patents
Expected scenario in 1987
NutraSweet’s patents are run outing in European and Canadian markets, and HSC has started puting up a 500-tonne production works in Netherlands 60 % of the soft drinks market is captured by Pepsi and Coca-Cola, which has multiple-year contracts with NutraSweet European market for aspartame is turning at a rate of 26 % per twelvemonth Scenario 1: HSC loses the anti-competitive instance against NutraSweet AG Major market portion consisting of Pepsi and Coca Cola will stay with NutraSweet In this instance, NutraSweet would non prosecute in monetary value wars with HSC and go on to bear down a premium for aspartame The Holland Sweetener Company can be after to capture rest 40 % of the soft drinks industry and addition market portion in other nutrient and drink industries HSC needs to stay sustainable till the terminal of long term contracts of Pepsi and Coca-Cola, and terminal of patent termination in U.S. Scenario 2: HSC wins the instance and NutraSweet’s contracts with Pepsi and Coca Cola are declared nothingness In this instance, European market will be unfastened for competition between NutraSweet and HSC Heavy revenge expected from NutraSweet as HSC’s entry will non travel unnoticed.
The Holland Sweetener will come in the market with monetary values lower than those charged by NutraSweet so as to pull major participants such as Pepsi and Coca Cola NutraSweet has immense installed capacities which it needs to use for economical returns. Therefore, it is expected to prosecute in monetary value wars to retain its control over the European and Canadian market Currently, aspartame is priced at $ 70 per pound. With the expected monetary value wars, the rates can fall down by 70 % which is equal to gross border of NutraSweet in 1986 Coca Cola and Pepsi will profit from the expected monetary value wars as both the companies will offer their merchandises at far lower monetary values
Figure 1: Payoff Matrix between HSC and NutraSweetIf one company reduces monetary values while the other maintains, the company with lower monetary values will capture market portion ( final payment of +2 ) from the rival ( final payment of -2 ) . If both lower monetary values market portion will be divided, with lower net income borders ( final payment of -1 ) . If both maintain monetary values, market portion will be divided, but borders will be maintained ( final payment of +1 ) . The above comparative final payments will ensue in the scenario where both participants lower monetary values taking to a monetary value war. As it is a perennial game scenario – it makes sense for both participants to corporate. But running at 100 % use is indispensable and NutraSweet has extra capacity, monetary values will fall.
