Case Study

Du Pont (E.I. du Pont de Nemours & Co, of Wilmington, Delaware) was founded as a gunpowder manufacturer early in the 1800s. Dow (The Dow Chemical Co. of Midland, Michigan) was formed in the late 1800s. 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.

b. Can you envision another strategy that either of these two companies might have used?