“It takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” So spoke the Red Queen in Lewis Carroll’s famous tale, Through the Looking Glass.
These words have inspired evolutionary biologists and business strategists to explain how entities interact and co-evolve with one another.
In Red Queen competition, firms are in a contest to discover new profit opportunities. Performance depends on matching or exceeding the actions of the rivals, as gains made by one firm tend to lead to a performance decrease by rival firms. This triggers a response that intensifies competition and leads to escalating activities by all the players. These actions may be tactical, involving few resources, such a price cuts; or less trivial and involve long-lasting commitments of resources.
The bigger the resource commitment, the stronger its signal and the stronger the call on rivals to decide whether or not to respond.
Red Queen and omega-3
Red Queen theory argues that despite inducing greater and more speedy responses from rivals, the most active and aggressive firms are the best performers. Of the companies investigated, BASF was the most active with 31 acquisitions and seven JVs in eight years. It also maintained the highest average ROTA and EBITDA margin. Thus, its history of inorganic growth and diversification has combined with its expertise in operational integration (its ‘Verbund’ philosophy) to provide it with a capability for creating value through acquisitions and JVs.
BASF’s main rival across its myriad of ingredient activities is Royal DSM. Since adopting a new strategy for maximising growth, ‘DSM in motion’ in 2010, the company stepped up its search for acquisition opportunities and has invested €2.4b in acquisitions in its nutrition division. BASF and DSM’s appetite for acquisitions took them towards head-on competition in the rapidly expanding €22bn omega-3 business.
The big fish have been swallowing the smaller fish. Competition has intensified as the market has grown, with BASF and DSM making sequential acquisitions to gain dominant market position.
BASF entered the space by acquiring Cognis in 2010 which itself had purchased fish oil company Napro Pharma in 2006. DSM became the leader in algal omega-3 oil with its €800m acquisition of Martek Biosciences in 2011, and the same year BASF invested in developing its own vegetarian sources through a collaborative agreement with Cargill.
The next moves saw BASF and DSM extending their omega-3 offerings to new markets, with more concentrated formats for pharmaceuticals and dietary supplements. BASF acquired Equateq and soon after DSM acquired another market leader, this time in fish-derived omega-3s, Ocean Nutrition Canada. BASF moved once more with its €680m acquisition of Pronova BioPharma, a specialist in fish oils for pharmaceutical use.
Since then both players have agreed partnerships to develop further sources: DSM and Monsanto developing omega-3 from soybean oil; and BASF is cooperating with Saudi Arabia’s National Prawn Company to give access to more biomass from algae. FMC has stepped in too, with its €260m acquisition of premium grade omega-3 manufacturer Epax, and all the while new entrants are joining the market space.
Market commonality and resource similarity
As the Red Queen effect predicts, the number of firm actions induces a greater number of more rapid responses from rivals. Competing firms may start out with a low degree of market commonality and resource similarity but end up with greater levels of both.
Of course it’s not the number of actions or responses that matters, or their timing. What counts is making the right actions. Omega-3 acquisitions have been prevalent as there have been concerns over access to adequate supplies of fish oil, the primary and traditional source, and also so firms can capture technologies to develop alternative and sustainable sources, such as algae.
As the industry has matured, more ingredient sources have developed and there is a trend for more highly concentrated forms, and whilst DSM has achieved the greater share of the omega-3 business, BASF’s timely acquisitions have enabled it to stay ahead as the leading supplier for the more rapidly growing nutrition and health industries.
The Red Queen predicts that all advantages are temporary, before the ‘perennial gale of creative destruction’ sweeps through. As the next generation of omega 3 sources are developed, and sources like krill oil are gaining market share, further consolidation is due and we anticipate who will be the next fastest runner.
Dr Matthew Jones is with CPL Business Consultants in the UK.