Du Pont – part B May 31, 1972: Du Pont decides on growth strategy 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 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 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. June 15, 1972: Kerr-McGee announces price raise from 26 to 28 c/lb, effective July 1. American Cyanamid follows. 1.Should Du Pont license to others? 2.Should Du Pont follow the price raise?

Du Pont – part C Du Pont does not follow, and continues to reject licensing requests 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. 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 exceeds 1972 forecast by 50-70K tpy Shortages worsen. Expected demand for 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. 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. 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? How should Du Pont react to Kerr McGee’s announcement?

Du Pont - part D July 15, 1974: Du Pont appropriates $8.2M for partial design of new plant in DeLisle. 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” 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. Unexpected sharp downturn in demand, escalating chlorine prices, higher investment costs for new capacity. Du Pont defers 2 nd line at DeLisle to and lowers target market share in 1985 to 60%. Du Pont defers 2 nd line at DeLisle to and lowers target market share in 1985 to 60%. Exp. demand for % below previous forecast. Implied 75% capacity utilization => significantly higher production costs. Exp. demand for % below previous forecast. Implied 75% capacity utilization => significantly higher production costs. January 1975: Kerr-McGee announces 5c price increase. January 1975: Kerr-McGee announces 5c price increase. What is the purpose of Du Pont’s press release? What is the purpose of Du Pont’s press release?

Du Pont – : slow demand, lenient environmental enforcement, higher costs 1975: slow demand, lenient environmental enforcement, higher costs Du Pont postpones 2 nd 100K De Lisle line indefinitely, decides on revised “growth” strategy with 55% target share in Du Pont postpones 2 nd 100K De Lisle line indefinitely, decides on revised “growth” strategy with 55% target share in Further stagnation of market. Kerr McGee gives up expansion plans Further stagnation of market. Kerr McGee gives up expansion plans 1978: FTC charges Du Pont with monopolization attempt 1978: FTC charges Du Pont with monopolization attempt –Charge dropped in : De Lisle plant starts production 1979: De Lisle plant starts production By 1985, five of Du Pont’s original competitors have exited (three by acquisition) By 1985, five of Du Pont’s original competitors have exited (three by acquisition)

N. American TiO 2 market in 2002

Du Pont takeaways – Long-run strategic planning Be aware of agency problems - here: Pigments department may be biased towards “growth”. 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? 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. Be aware of connections between different assumptions, e.g. market demand and competitors’ expansion plans. –See FT article on scenario analysis

Du Pont takeaways – Preemption Classical example of preemption by capacity expansion Classical example of preemption by capacity expansion Short-run competition is in prices (under capacity constraints) 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 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 Preemption works best for firm with sustainable competitive advantage – otherwise, rivals might try to do the same If successful, rivals are likely to sue If successful, rivals are likely to sue

Du Pont takeaways – Tactical maneuvers What constitutes a commitment? What does “moving first” mean? 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: 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. 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.