Question

Du Pont (E.I. du Pont de Nemours & Co, of Wilmington, Delaware) was founded as a
gunpowder manufacturer early in the 1800s. Explosives dominated its business
through World War I. After the war, it began to diversify. Acquisitions and joint
ventures became more prominent during the last fifteen years. In 1981 it acquired
Conoco, a major oil company. In 1991 Du Pont joined with prescription drug
company Merck & Co. In1992, in a joint venture with Crop Genetics, Du Pont moved
into the bioinsecticide field. In 1993 it bought Imperial Chemical’s nylon business,
and today it remains the largest chemical company in the United States.
Dow (The Dow Chemical Co. of Midland, Michigan) was formed in the late 1800s. Its
first product was chlorine bleach, and numerous others soon followed. The need for
chemicals during each of the world wars resulted in Dow emerging as the second
largest chemical company in the United States. During the 1980’s Dow made several
acquisitions, most notably Merrell pharmaceuticals, Texise cleaning products, and
Essex Chemical, a leading producer of automotive sealants and adhesives. In the late
1980s, Dow joined with Eli’s Lilly and Company’s fungicide business to create Dow
Elanco, a major producer of agricultural chemicals. Thus, like Du Point, Dow became
a diversified chemical giant.
For more than forty years, both Dow and Du Pont employed a similar strategy. Both
borrowed heavily and used the funds for expansion, relying on rising demand coupled
with price increases to maintain healthy levels of profit. The huge cash flow
necessitated by this strategy could sometimes lead to problems. If the expansion was
more rapid than the increase in demand, prices would have to be cut and profits would
suffer. Although that happened occasionally, it began to occur more and more
frequently by the end of the 1980s.
In 1991 Du Pont decided to change its strategy by reducing both capital spending and
costs. This focused the company on getting cash back quickly. By 1993 Du Pont was
able to provide for all capital funding without any substantial borrowing. And 1994 was even better Analysts were expecting Du Pont to raise its dividend payments to
stockholders in 1994.
Du Pont also reorganized. It eliminated nearly 14,000 employees early in 1994. Du
Pont also decentralized into twenty strategic business units (SBUs) based on products
and industry, and it changed its pattern of marketing from a technology driven
approach to a market driven one.
Dow, on the other hand, remained with the traditional strategy. In 1980 it expanded
basic chemicals, and the resulting glut caused a drop in prices. As a result, earnings fell
in 1992. To raise cash to cover expansion and dividends, Dow had to sell assets – a
billion dollars worth in 1993 alone. It also announced that it would focus on global
competitiveness and cut back its corporate headquarters workforce.
Thanks to cutting back on spending in 1994 and a rebound in ethylene prices, Dow was
in good financial shape that year, although analysts were not expecting Dow to be able
to raise its dividend payments for several years. Dow did, however, semi to be
recognizing the need to change its strategy too.
Du Pont recognized the need to change strategy before Dow did. Given the high cost of
capital, a strategy of focusing on return on assets seemed to make more sense than one
that focused on market share.
a. Describe the two strategies used by Dow and Du Pont. What are the advantages and
disadvantages of each? Under what conditions would you use each of the two
strategies? Why? Explain your response.
b. Can you envision another strategy that either of these two companies might have used?
What changes would you recommend for the future?

Answer 1

very tough question for me