E. I. Du Pont De Nemours and Co.

E. I. du Pont de Nemours and Co.:

Titanium Dioxide

Description of the problem

E. I. du Pont de Nemours and Co. is a heavy diversified manufacturer of fibers, plastics, industrial chemicals, and other specialty chemical products. In the start of the 1970 E. I. du Pont found itself in a very unique and advantageous position; in the pigment market, titanium dioxide (TiO2) was going through some major events that transformed the market in Du Pont’s favor. Up until this point, titanium dioxide, a white chemical agent used in manufacture of paints, paper, synthetic fibers, plastics, ink, and synthetic rubber; had been produced through two manufacturing processes, a sulfate and a chloride processes. Each process was relatively financially identical, both processes would produce a very similar quality product with a similar value at a nearly identical cost. At the time the only major difference was that the sulfate process did not require a high-grade feedstock but would produce a large amount of hazardous waste while the chloride process would require a higher-grade feedstock while producing much less hazardous waste. Regardless of what process any manufacturer used to produce TiO2, the domestic sales were projected to reach 730,000 tons by the end of 1972 with a dollar value of $340 million. The price of TiO2 was also extremely stable with the prices remaining between $26 and $27 a ton. Du Pont themselves had used predominantly a chloride process called the ilmenite chloride process and was the only one in the market to do so, other companies like National Lead, the leading TiO2 producer next to du Pont, had used the sulfate process.

Between 1969 and 1972, two major events transformed the market; a sudden shortage of rutile ore and new environmental regulations that made the sulfate process (and a chloride process that used lesser quality feedstock) massively impractical. Before these changes occurred, Du Pont only had a small cost advantage with its ilmenite chloride process but after the market transformation, their process became significantly cheaper than the other two technologies. Du Pont was in a very advantageous position so Du Pont recognized the opportunities and risks. The next goal was to formulate a strategy to cope with the changing environment; it had come down to whether it would more advantageous to implement a growth strategy or a maintain strategy. With the growth strategy, Du Pont could increase its market share to 65% compared to the maintenance strategy’s 45% projected market share but the cost of implementing the growth strategy may prove to be more expensive than it would be worth.

A summary of your analysis of the problem

In Do Pont’s case, it mentioned that Du Pont consisted of 10 industrial department. Especially, the pigments department which took responsibilities for titanium dioxide was the second smallest in 10 departments. With sales of approximately $180 million, it only occupied 4.68% in total sales in 1971. Hence, in our view, we thought if investing more capital could bring the company more profit, Du Pont supposed to pursue the the growth strategy.

At the beginning, In the 1960s, Du Pont had an advantage that they own easy access to new metals in Australia that offered a new operation that no one else had. However, in order to decide what the next step Du Pont suppose to do, our group made analysis below; firstly, we considered the risks or opportunities that Du Pont would meet for different strategies. If Du Pont happens to use the growth strategy in face its unique scenario, it is projected to gain a 64% market share. For the other producers in the TiO2 market like National Lead, Du Pont will be seen as their greatest threat in the market. Conversely, that it was environmental legislation that lead to restrictions on producing methods, there will most likely be legislation put forth in order to loosen restrictions on producing methods and/or legislation that will encourage Du Pont operate their ilmenite chloride method of producing TiO2. Also, they used their scale to take advantage in pricing and undercut the competition. Another likely reaction from competitors in the face of Du Pont’s growth strategy is copycats; some competitors will want to copy what it is that is putting Du Pont at such an advantage.

On the other hand, although the maintenance strategy comes with much less risk, we observed that the dramatic change in market share for Du pont’s strategic alternative. The exhibit 4 demonstrated that if Du Pont applied the maintenance strategy, the market share would grow from 35% to 45% during 1972 to 1975, then it remain at 45% until the end of 1985; comparing with the growth strategy which the market share grew from 35% in 1973 to 64% in 1985; obviously, The market share in the maintenance strategy was  less than the one in the growth strategy.

Second, through the data in exhibit 4, we can calculated Du pont's Earnings Before Interest and Tax (EBIT) for both of strategies in the period of 1973 to 1985; also notice that how the growth strategy bring lots of profit for Du Pont. We found that Du Pont’s EBIT would grow from $55,272 to $397,926 for applying the growth strategy; however, even though the EBIT for the maintenance strategy was also upward, the rise was not as high as for the growth strategy. That is to say, Du Pont would earn more profit by using the growth strategy; moreover, the rise of EBIT for the growth strategy would be almost two times higher than EBIT for the maintenance strategy.In addition, to be more precisely, our group used exhibit 4 as well as EBIT we got to calculated Free Cash Flow (FCF) for two kinds of strategies. Likewise, we have same conclusion as EBIT. Both of FCF for growth strategy and maintenance strategy were upturns. However, the rise of FCF for the growth strategy would be over there times higher than FCF for the maintenance strategy.Accordingly, in order to get more profit, we thought Du Pont supposed to pursue the growth strategy.

Recommendations

Based on the analysis by our group, we highly recommend Du Pont apply the growth strategy. Visibly, since applying the growth strategy could bring Du Pont more profit which were proof by the higher incremental EBIT as well as FCF. Furthermore, because of the improvement in producing technology, Du pont's competitors started to have advantage of low cost in process so that Du Pont had to encounter the risk of market would be shared by others; therefore, only through growth strategy, Du Pont will earn steady increment on market share. Considering reasons we promoted above, we thought Du Pont supposed to pursue the growth strategy.