Bitter

HarvardBusinessSchool9-794-079Rev.November13,2000ProfessorAdamM.Brandenburgerpreparedthiscaseasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.ThecasedrawsonareportbyPeterWetenhall(MBA‘92).AssistancefromResearchAssociateMaryellenCostello,RenaHenderson,andResearchAssistantJuliaKouisgratefullyacknowledged.Copyright©1993bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1BitterCompetition:TheHollandSweetenerCompanyversusNutraSweet(A)Inlate1986,theHollandSweetenerCompany(HSC),basedinMaastricht,theNetherlands,waspreparingtoentertheEuropeanandCanadianaspartamemarkets.Aspartame,alow-calorie,high-intensitysweetener,hadbeendiscoveredin1965byG.D.Searle&Co.,aU.S.pharmaceuticalscompany.Afterhavingsecuredanumberofpatentsonitsdiscovery,Searlehadgoneontodevelopmarketsforaspartameasafood-and-beverageadditive.By1986,NutraSweet,theoperatingentitysetupbySearletobuildtheaspartamebusiness,hadreachedsalesof$711million.Now,NutraSweet’spatentsintheEuropeanandCanadianmarketswereduetoexpireasof1987,althoughtheU.S.marketwouldremainprotecteduntilDecember1992.WinfriedVermijs,presidentofHSC,reviewedhiscompany’sstrategyforcompetingintheaspartamebusiness.PriceandvolumeforecastshadbeenpreparedfortheEuropeanandCanadianaspartamemarkets.Onprice,twoscenarioswerebeingentertained:“normalcompetition”and“pricewar.”Vermijswonderedwhichscenariowasthemorelikely.AspartameHigh-intensitysweetenershadalonghistory.InRomantimes,grapejuicewasboileddowninleadpanstoproducesapa,asweetcompoundusedforeverythingfromafoodadditivetoanoralcontraceptive.Presagingconcernsoverthesafetyofmodernhigh-intensitysweeteners,useofsapaunfortunatelyledtoneurologicaldamageorevendeath.Discoveredin1879,theoldesthigh-intensitysweetenerstillinusewassaccharin,apetroleumderivativeabout300timesassweetassugar(sucrose)ofequalweight.Inthe1960s,AbbottLaboratoriesdevelopedcyclamate(30timesassweetassugar)but,followingstudiessuggestingalinktocancer,theFoodandDrugAdministration(FDA)bannedcyclamatein1970.In1977,theFDAtriedtobansaccharinaswell,buttheresultingpublicoutcrycausedCongresstointerveneanddeclareamoratorium.Manufacturersofsaccharinwere,however,requiredtoplacenoticesonlabels,warningconsumersofthepossibleincreasedcancerrisk.Apartfromthesafetyissue,manypeoplefoundsaccharintohaveaslightlybitter,metallicaftertaste.AspartamewasawhitepowderconsistingofL-asparticacidandL-phenylalanine,twonaturallyoccurringopticallyactiveaminoacids,togetherwithasmallamountofmethanol.Ithad794-079BitterCompetition:TheHollandSweetenerCompanyversusNutraSweet(A)2thesamecaloriccontentassugarofequalweight,butwas180timesassweet.Unlikesugar,aspartamedidnotpromotetoothdecay.Themaindrawbacksofaspartamewerethatitbecameunstablewhenexposedtohightemperatures(asinbaking)andthatithadalimitedshelflifeinsoftdrinks.Aspartamehadbeendiscoveredbyaccident.In1965,JamesSchlatter,aresearchscientistatG.D.Searle&Co.,apharmaceuticalscompanybasedinSkokie,Illinois,wasworkingonaprojecttodevelopananti-ulcerdrug.WhileexperimentingwithL-asparticacidandL-phenylalanine,hehappenedtolickhisfingertopickupapieceofpaperandnoticedasweettaste.Helatercoinedtheterm“aspartame”forthecombinationofaminoacids.NutraSweet1G.D.Searle&Co.wasformedin1908,althoughthecompany’srootscouldbetracedbackto1888.FromitsupperMidwestbeginnings,SearlegrewtobecomeaFortune500pharmaceuticalscompanyin1968.Followingitsserendipitousdiscoveryofaspartame,thecompanyhadanopportunitytostrikeoutinanewdirection.Searlesecuredtwokeypatentsonaspartame.The“use”patent,obtainedin1970,coveredanyuseofaspartameasasweeteningingredient.The“blend”patent,obtainedin1973,coveredcombinationsofaspartameandsaccharin.ApprovalfromtheFDAfortheuseofaspartameasafoodadditivewassoughtthesameyear.2Aftergivingagreenlighttodryuseofaspartame(tabletopsweetenersandpowdereddrinks)in1974,theFDAwithdrewitsapprovalshortlyafterwards,pendingtheresultsoffurthertests.NotuntilJuly1981didtheFDAgivethefinalgo-aheadfordryuseofaspartame.Wet-useapproval(softdrinks)cameinJuly1983.Inthewakeoftheregulatorydelays,Searlesoughtextensionsofitstwopatents.Itwassuccessfulingettingtheusepatentextended—to1987inEurope,toDecember14,1992intheUnitedStates,andtoApril1993inAustralia.AnattempttoextendtheCanadianusepatent,whichwasduetoexpirein1987,wasunsuccessful.TheblendpatentwasextendedtoNovember4,1996,intheUnitedStates.ManufacturingTomanufactureaspartameonacommercialscale,SearleturnedtoAjinomoto,amajorJapanesechemicalsandfoodcompany.Ajinomotowasaleadingplayerinaminoacidresearchandproduction,dominatingthemonosodiumglutamate(MSG)market.(ForfinancialdataonAjinomoto,refertoExhibit3.)Ajinomotosuppliedachemicalcouplingprocessformanufactur