Co-Opetition - Adam M. Brandenburger [39]
There is an epilogue to this story. Holland was able to turn its difficulties into a bargaining chip. Coke and Pepsi had to worry that Holland might exit the game, and them they’d find themselves again totally reliant on NutraSweet. Thus, Holland was in a position to get paid to stay. In return for a guaranteed contract, Holland did stay, and even expanded capacity.
Keep track of the Holland Sweetener story as you evaluate Norfolk Southern’s strategy in its negotiations with Gainesville Regional Utility.
Another Coal Porter In Gainesville, Florida, electricity and water come from the city-owned Gainesville Regional Utility.6 This utility has a problem. It has always been dependent on one railroad, CSX, for delivery of coal. As you might expect, CSX has done well selling coal to Gainesville: in 1990 the price was $20.13 a ton. So it was quite a coup that July when Gainesville negotiated a deal with Norfolk Southern railroad to deliver coal at $13.68 a ton.
The only problem was that Norfolk Southern couldn’t quite deliver because its closest line came up short—twenty-one miles from Gainesville. Close wasn’t good enough.
Gainesville asked CSX for permission to let Norfolk Southern use its tracks. CSX declined. Why give away its monopoly? That was just Gainesville’s opening move. With the option for the cheaper coal, the city decided it was worth building a twenty-one-mile connecting line, even at a projected cost of $28 million.
At this point, the situation looked promising for Norfolk Southern. It had put Gainesville on the line, so to speak, for the costs of building the spur, and it had a contract to deliver coal at $13.68 a ton if the line was in fact built. No downside, only upside.
Norfolk Southern did have to expend some political capital. Because the proposed line would pass through some wetlands, Gainesville and Norfolk Southern had to go before the Environmental Protection Agency. There were also hearings before the Interstate Commerce Commission, which regulates railroads.
CSX didn’t stand still. In October 1991 CSX responded to the Norfolk Southern offer by lowering its price by $2.25 a ton. Then CSX let it be known that if Gainesville went ahead with Norfolk Southern, the existing line would no longer be economically viable, and CSX would be forced to abandon it. This would leave Gaines ville hostage to Norfolk Southern. Donna Rohrer, vice-president of corporate communications at CSX, warned: “They’ll wind up with someone else, but not competition.”7
In November 1992, when it looked as if Gainesville might actually get permission to build the spur line, CSX lowered its price by another $2.50 a ton. At that point, it no longer made economic sense to build the connection. CSX got a new contract running through 2020, and Gainesville got $34 million in savings (present discounted value) over the life of the contract.
The outcome wasn’t a disaster for Norfolk Southern. It didn’t get Gainesville’s business, but it didn’t lose any money, either. Still, Norfolk Southern could have done better.
The mistake was to give away competition. Without Norfolk Southern, Gainesville had no threat to make to CSX. With Norfolk Southern, the city could and did make a very credible threat. That was the game. As Anthony Hatch, a PaineWebber analyst, explained: “It’s an expensive venture to build a railroad.… Sometimes, the threat to do it is enough.”8 Here, making the threat was worth