Dupont Case
Overview
In 1972, Du Pont found itself in a fortunate position as it was faced with the following two options:
1. Continue with its existing strategy and maintain its current revenue stream; or
2. Modify its strategy and invest additional capital to increase its revenue stream in the future.
As one can imagine, multi-million dollar investment decisions such as these are not easily made and require a tremendous amount of due diligence to include financial forecasting, labor ramifications, and extensive research.
Market Position
Du Pont's position in the market was fortunate for several reasons. First, Du Pont was a leader in the Titanium Dioxide industry possessing the highest capacity for use of the ilmelite chloride process. Two …show more content…
recent developments in the industry, sharp increases in the cost of rutile ore required for the sulfite based process and the heightened environmental regulations enacted against domestic sulfur based plants made the ilmelite chloride process more attractive. Du Pont had a competitive advantage in the ilmelite chloride process accounting for approximately 60% of the total market production in 1970. This advantage was strengthened by the fact that the number two producer, NL Industries, was highly leveraged and the other producers in the market were relatively much smaller. This competitive advantage translated to an average pre-tax profit margin of 40% doubling that of its competitors in the industry. Therefore, the company could afford to cut prices as needed to keep future competitors out of the industry and maintain market share.
Finally, Du Pont was a large diversified company that spanned a number of different industries.
While the pigments department, responsible for the production of titanium dioxide, was an important part of Du Pont's holdings, it was still the second smallest of Du Pont's ten departments. Therefore, the risk associated with the pigment department was fairly …show more content…
mitigated.
The Issue
The issue facing Du Pont is whether or not to invest additional money into this capital intensive process and expand production. Granted, the added production would provide higher cash flows in the future; however, it is uncertain whether or not such an investment would generate the desired returns. Through our analysis, we believe, Du Pont should move forward with the investment and increase production. Using the numbers in Appendices A and B, the "maintain" strategy of non-expansion leads to positive future cash flows of $50M+, while the "growth" provides over $130M. Through our analysis, we believe the decision is fairly simple: pursue the "Growth" strategy.
Other Considerations
There are always inherent risks involved in pursuing a particular course of action.
For example, cost overruns, regulation, and the development of huge economies of scale were risks that were obviously present for Du Pont. However, it already had the funding and expertise to build these facilities and could do so more effectively than any present competitor. The company also had the name and established corporate presence necessary to facilitate such development. With the contacts Du Pont had established throughout the political and labor world, it would likely encounter fewer problems than any other company seeking to enter the industry or expand in it.
Consequently, the risks surrounding these future cash flows appear to be minimal. Du Pont has the most cost effective and environmentally clean process, and there appears to be no shortage of the necessary raw material given that it was just discovered a few years prior. As a result, the growth strategy appears to be the more attractive option.
Du Pont should examine other factors as well. For example, it should determine whether or not there is a better use for the capital inside the company. With no knowledge of other opportunities, it is difficult to get a gauge where it should apply its excess capital. As our analysis shows, it would be difficult to exceed the NPV gain of $80M(+) in choosing the "growth" strategy over the "maintain"
strategy.
Sensitivity Analysis
The company should also conduct some "sensitivity analysis" to verify all external factors that could possibly affect the raising or lowering of projected future cash flows (insert our analysis of such sensitivities here best case, worst case, most likely).
Conclusion
Our conclusion in this case, as indicated above and verified again through our sensitivity analysis, is to pursue a "Growth" strategy. Du Pont has much to gain if they were to choose this course of action. One of their smaller industries could grow to become a more significant contributor to the company and could fund future growth. As stated, the risks to choosing such a path are minimal, especially with the recent decline of many of its competitors. Finally, they have the industry knowledge and presence to be able to expand in the right way without attracting the ire of legislators and environmentalists.
Du Pont has been handed a very fortuitous set of circumstances. Some of the factors can be attributed to their own decision making (to diversify production using the ilmenite process) and others can not be (environmental crackdowns on sulfur plants, high cost of rutile ore). The company should leverage these circumstances and use them as opportunity to take a small part of their company and turn it into a future growth engine.
In 1972, Du Pont found itself in a fortunate position as it was faced with the following two options:
1. Continue with its existing strategy and maintain its current revenue stream; or
2. Modify its strategy and invest additional capital to increase its revenue stream in the future.
As one can imagine, multi-million dollar investment decisions such as these are not easily made and require a tremendous amount of due diligence to include financial forecasting, labor ramifications, and extensive research.
Market Position
Du Pont's position in the market was fortunate for several reasons. First, Du Pont was a leader in the Titanium Dioxide industry possessing the highest capacity for use of the ilmelite chloride process. Two …show more content…
recent developments in the industry, sharp increases in the cost of rutile ore required for the sulfite based process and the heightened environmental regulations enacted against domestic sulfur based plants made the ilmelite chloride process more attractive. Du Pont had a competitive advantage in the ilmelite chloride process accounting for approximately 60% of the total market production in 1970. This advantage was strengthened by the fact that the number two producer, NL Industries, was highly leveraged and the other producers in the market were relatively much smaller. This competitive advantage translated to an average pre-tax profit margin of 40% doubling that of its competitors in the industry. Therefore, the company could afford to cut prices as needed to keep future competitors out of the industry and maintain market share.
Finally, Du Pont was a large diversified company that spanned a number of different industries.
While the pigments department, responsible for the production of titanium dioxide, was an important part of Du Pont's holdings, it was still the second smallest of Du Pont's ten departments. Therefore, the risk associated with the pigment department was fairly …show more content…
mitigated.
The Issue
The issue facing Du Pont is whether or not to invest additional money into this capital intensive process and expand production. Granted, the added production would provide higher cash flows in the future; however, it is uncertain whether or not such an investment would generate the desired returns. Through our analysis, we believe, Du Pont should move forward with the investment and increase production. Using the numbers in Appendices A and B, the "maintain" strategy of non-expansion leads to positive future cash flows of $50M+, while the "growth" provides over $130M. Through our analysis, we believe the decision is fairly simple: pursue the "Growth" strategy.
Other Considerations
There are always inherent risks involved in pursuing a particular course of action.
For example, cost overruns, regulation, and the development of huge economies of scale were risks that were obviously present for Du Pont. However, it already had the funding and expertise to build these facilities and could do so more effectively than any present competitor. The company also had the name and established corporate presence necessary to facilitate such development. With the contacts Du Pont had established throughout the political and labor world, it would likely encounter fewer problems than any other company seeking to enter the industry or expand in it.
Consequently, the risks surrounding these future cash flows appear to be minimal. Du Pont has the most cost effective and environmentally clean process, and there appears to be no shortage of the necessary raw material given that it was just discovered a few years prior. As a result, the growth strategy appears to be the more attractive option.
Du Pont should examine other factors as well. For example, it should determine whether or not there is a better use for the capital inside the company. With no knowledge of other opportunities, it is difficult to get a gauge where it should apply its excess capital. As our analysis shows, it would be difficult to exceed the NPV gain of $80M(+) in choosing the "growth" strategy over the "maintain"
strategy.
Sensitivity Analysis
The company should also conduct some "sensitivity analysis" to verify all external factors that could possibly affect the raising or lowering of projected future cash flows (insert our analysis of such sensitivities here best case, worst case, most likely).
Conclusion
Our conclusion in this case, as indicated above and verified again through our sensitivity analysis, is to pursue a "Growth" strategy. Du Pont has much to gain if they were to choose this course of action. One of their smaller industries could grow to become a more significant contributor to the company and could fund future growth. As stated, the risks to choosing such a path are minimal, especially with the recent decline of many of its competitors. Finally, they have the industry knowledge and presence to be able to expand in the right way without attracting the ire of legislators and environmentalists.
Du Pont has been handed a very fortuitous set of circumstances. Some of the factors can be attributed to their own decision making (to diversify production using the ilmenite process) and others can not be (environmental crackdowns on sulfur plants, high cost of rutile ore). The company should leverage these circumstances and use them as opportunity to take a small part of their company and turn it into a future growth engine.