Du Pont

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 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 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