How much risk and uncertainty surround these future cash flows? Which strategy looks most attractive?
3. How might competitors respond to du Pont's choice of either strategy in the TiO2 market? What other factors should du Pont consider in making this decision?
4. Which strategy should du Pont pursue?
Note: In 1972, bond yields and the inflation rate were approximately as follows... displayed 300 characters
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Which strategy should du Pont pursue?
Note: In 1972, bond yields and the inflation rate were approximately as follows. Long-term treasuries = 6.2%; Aaa corporate bonds = 7.2%; Baa corporate bonds = 7.8%; inflation rate (CPI) = 3.2%.
Company Background
? Diversified manufacturer of fibers, plastics, industrial chemicals and other specialty chemical products
? Conservatively managed company with longstanding AAA bond rating
? Relied on retained earnings to fund capital expenditure programs
? Organized into 10 industrial departments (second smallest being pigments)
Titanium Dioxide Market
? White chemical agent used in manufacture of paints, paper, synthetic fibers, plastics, ink and synthetic rubber
? Manufacturing TiO2 involve sulfate process and chloride process
? Projected sales expected to reach $340 million by end of 1972
? Volume of sales had been growing at 3% per year over past decade
? Sales projected to reach over 1 million by 1985
Capacity Decisions
? Introduced ilmenite chloride technology at Edge Moor plant in 1952 (only company with operational knowledge of this method)
? Another ilmenite chloride plant opened in 1985 in New Johnsonville, TN
? National Lead was second largest supplier of TiO2
? National Lead generally less profitable and relied more on debt to finance growth
Transitions in TiO2 Market
? In 1970/71 rutile ore prices rose dramatically, advantage given to chloride technology
? Sulfate process plants were required to comply with new enacted legislation
? Production declined sharply, devaluation of US dollar and continuation of tariff cut imports significantly
? Resulted in substantial excess demand
Strategic Alternatives in TiO2
? Pigment department head considered two options
? Maintain strategy – boost Du Pont’s market share to 45% over next several years
? Growth strategy – expanding capacity through 1985, pricing TiO2, and restricting licensing of ilmenite chloride process (expected market share to be 65%)
? Cost of new capacity was expected to be $900 per ton in 1973
? Capital investment would be eligible for 10% investment tax credit
? Du Pont’s pretax operating profit margin before interest, but after depreciation on new capacity was expected to average 40%
Links
du Pont product website
Background write up from Lehigh
Summary of case concepts displayed 300 characters
