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Du Pont – part B

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

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Du Pont – part B

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  1. 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. • Should Du Pont license to others? • Should Du Pont follow the price raise?

  2. 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?

  3. 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?

  4. Du Pont – 1975-85 • 1975: slow demand, lenient environmental enforcement, higher costs • 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 plans • 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)

  5. N. American TiO2 market in 2002

  6. 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’ behavior? • 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

  7. Du Pont takeaways –Preemption • 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

  8. Du Pont takeaways –Tactical maneuvers • What constitutes a commitment? What does “moving first” mean? • An announcement is not a commitment – rivals’ perceptions crucial • 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.

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