Co-Opetition - Adam M. Brandenburger [130]
Holland Sweetener entered the European market with a small, 500-tonne plant. There was an element of judo in Holland’s strategy. NutraSweet, the established player in Europe, owned the market. Cutting price to kill off the challenger would hurt NutraSweet much more than ceding some share. And yet, shortly after Holland’s entry, NutraSweet cut price aggressively, triggering a price war. By early 1990, aspartame prices in Europe had fallen from $70 to $22–$30 per pound, and Holland was losing money.
What was NutraSweet up to? At face value, the price cuts didn’t make economic sense. In slashing price, NutraSweet gave up 80 percent of its profit margins. It would have done better to live and let live and give up some share.
But looking only at the European market is too narrow a scope. NutraSweet was looking ahead to the time when the U.S. market would open up. Holland’s 500 tonnes would serve 5 percent of the world market. That wasn’t the problem. The problem was that if Holland made money, it would have a natural temptation to expand. NutraSweet hoped to nip the “tulip” in the bud.
By fighting in Europe, NutraSweet denied Holland access to the learning curve and starved it of profits. Even more important, NutraSweet’s aggressive response set a precedent. Its tactic was designed to create the perception that the same hostile reaction would await any other entrants into the market. A price war in Europe served as a warning to anyone considering entry into the U.S. market after 1992. NutraSweet was hoping, no doubt, that Holland would be among those who got the message.
A message was sent, but how should it have been received? Perhaps NutraSweet was simply bluffing. Just because it had fought a price war in Europe didn’t mean it was committed to fighting one in the United States. The rationale for NutraSweet’s fighting in Europe was to deter entry into the U.S. market. But if deterrence failed, and someone did enter the U.S. market, the rationale for launching a second price war didn’t exist. At that point, NutraSweet wouldn’t have any other markets left to protect.
Putting itself in NutraSweet’s shoes, Holland could figure out that NutraSweet had little to gain by starting a price war in the U.S. market. In fact, it had plenty to lose. The U.S. market, at ten times the size of the European market, seemed far too profitable to sacrifice in a price war.
By this logic, Holland could safely ignore the price war in Europe, expand capacity, and enter the U.S. market. But taking this logic one step further, why, then, had NutraSweet bothered to fight in Europe? Perhaps NutraSweet wasn’t so cool and calculating, after all. Maybe it would launch a price war in the U.S., anyway. Or perhaps NutraSweet was cool and calculating but thought it could convince Holland that it wasn’t.
Bluff or not, NutraSweet’s tactic worked. The price war in Europe made it harder for Holland to justify expanding capacity. It was losing money in Europe, and it now perceived prospects in the U.S. as less rosy than it had initially thought. As a result, Holland delayed its expansion plans, and when the U.S. market opened up to competition in late 1992, Holland could stage only a limited presence there.25 True, Coke and Pepsi were able to use even Holland’s limited presence to negotiate lower prices from NutraSweet, but those new prices would have been even lower had Holland been a more credible player. With its small capacity, Holland was unable to supply all of Coke’s or Pepsi’s needs. That limited the extent to which Coke and Pepsi could use Holland as a bargaining chip against NutraSweet.
Holland’s small plant didn’t work as a judo strategy. On the contrary, by starting small, Holland tempted NutraSweet into launching a price war in Europe. Perhaps the war was only a bluff, but even a small chance of the bluff working was incentive enough for NutraSweet. The cost to NutraSweet of a price war in the small European market was insignificant