DuPont Take Away

Du Pont – part B
 May 31, 1972: Du Pont decides on growth strategy
– Phase 1 (’72-’76): expand capacity at existing plants
– Phase 2: start new 100K tpy ilmenite chloride plant by 1977, add
second line by 1985
 Du Pont continues to be approached by competitors who want to
license its ilmenite chloride technology
 Spring 1972: demand surge and slow capacity expansion lead to
95% industry capacity utilization
 June 15, 1972: Kerr-McGee announces price raise from 26 to 28
c/lb, effective July 1. American Cyanamid follows.
1. Should Du Pont license to others?
2. Should Du Pont follow the price raise?
Du Pont – part C
 Du Pont does not follow, and continues to reject licensing requests
 Spring 1973: expansion of New Johnsonville plant completed. No
shutdowns of sulfate plants in US. Du Pont raises price by 1c/lb.
 Shortages worsen. Expected demand for 1976-77 exceeds 1972
forecast by 50-70K tpy
 November 1973: Du Pont announces that is has begun to study
the possibility of a major new ilmenite plant in DeLisle, MS, with
$100M initial investment and expansion in mind.
 July 1974: Kerr-McGee announces plans to build 50K rutile
chloride plant and a 100K ore enrichment facility.
 How should Du Pont react to Kerr McGee’s announcement?
Du Pont - part D
 July 15, 1974: Du Pont appropriates $8.2M for partial design of
new plant in DeLisle.
 Press release: Du Pont had authorized the expenditure for
“detailed design and order of long delivery equipment”
 Unexpected sharp downturn in demand, escalating chlorine prices,
higher investment costs for new capacity.
 Du Pont defers 2nd line at DeLisle to 1982-83 and lowers target
market share in 1985 to 60%.
 Exp. demand for 1975 20-25% below previous forecast. Implied
75% capacity utilization => significantly higher production costs.
 January 1975: Kerr-McGee announces 5c price increase.
 What is the purpose of Du Pont’s press release?
Du Pont – 1975-85
 1975: slow demand, lenient environmental enforcement, higher
 Du Pont postpones 2nd 100K De Lisle line indefinitely, decides on
revised “growth” strategy with 55% target share in 1985.
 Further stagnation of market. Kerr McGee gives up expansion
 1978: FTC charges Du Pont with monopolization attempt
– Charge dropped in 1979
 1979: De Lisle plant starts production
 By 1985, five of Du Pont’s original competitors have exited (three
by acquisition)
N. American TiO2 market in 2002
DuPont, Altamira, Mexico (C)
DuPont, De Lisle, Miss. (C)
DuPont, Edge Moor, Del. (C)
DuPont, New Johnsonville, Tenn. (C)
Kerr-McGee, Hamilton, Miss. (C)
Kerr-McGee, Savannah, Ga. (C)
Kerr-McGee, Savannah, Ga. (S)
Kronos Canada, Varennes, Quebec (C)
Kronos Canada, Varennes, Quebec (S)
Louisiana Pigment, Lake Charles, La. (C)
Millennium Chemicals, Ashtabula, Ohio (C)
Millennium Chemicals, Ashtabula, Ohio (C)
Millennium Chemicals, Baltimore, Md. (C)
Millennium Chemicals, Baltimore, Md. (S)
Demand in 2002:
Growth 97-02:
Growth forecast
through 2006:
Du Pont takeaways –
Long-run strategic planning
 Be aware of agency problems - here: Pigments department may be
biased towards “growth”.
 In assessing returns from an investment, what are you (implicitly)
assuming about how market works and about competitors’
– Connections between industry capacity, market demand and price
– How are competitors assumed to respond, and are those assumptions
consistent with economics of market?
 Be aware of connections between different assumptions, e.g.
market demand and competitors’ expansion plans.
– See FT article on scenario analysis
Du Pont takeaways –
 Classical example of preemption by capacity expansion
 Short-run competition is in prices (under capacity constraints)
– Like airline example in lecture 1
 Long-run competition is in capacity choices (=quantities), possibly
with asymmetric cost structures
 Apply Cournot model
– Strategic substitutes: If one firm produces more, others will rationally
produce less.
– Overinvest to be tough (“Top-dog” strategy)
 Preemption works best for firm with sustainable competitive
advantage – otherwise, rivals might try to do the same
 If successful, rivals are likely to sue
Du Pont takeaways –
Tactical maneuvers
 What constitutes a commitment? What does “moving first” mean?
– An announcement is not a commitment – rivals’ perceptions
– Which moves involve sunk costs, and how do they affect the
costs of continuing?
– Signals are valuable if they affect rivals’ actions
 Tradeoff between commitment and flexibility:
– Good to keep options open to see how market evolves, but that
undermines commitment strategy.
 Tradeoff between short-run and long-run goals.
– Here: cooperating on price is good for profits in short run, but
may invite others to expand capacity.