Dupont Hbs Case Study

Industrial Organization Case Studies Michaelmas Term

Matthew Chesnes The London School of Economics December 14, 2001

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Week 3 - Dupont Case

Introduction of DuPont Case

• DuPont is in the Titanium Dioxide (T IO2 ) business and a new technology comes along that is more efficient than previous methods. The standard technology involved Rutile in production but the technology involves an Ore called Ilmenite. This new technology would give DuPont a cost advantage over the rest of the market. So Dupont is faced with a decision. Grow quickly in the T IO2 business and hopefully discourage other competitors to do the same (a preemption strategy). Or maintain current expansion plans and remaining on or around their current market share. • 3 effects will determine DuPont’s cost advantage in T IO2 production: Scale (Total Capacity / Number of Plants), cummulative production, and Capacity Utilization (Total output / Total capacity). This is because with the new technology comes massive returns to scale and a learning by doing advantage. The orginial cost differential is just 2 cents (22.6 versus 24.6) but these numbers need to be reduced by the appropriate measures which will come out of the regression coefficients. • We will also look at the profit stream from Dupont which is dependent on demand growth in the economy.

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Week 4 - Dupont Case

Discussion and Conclusions

• Regression Results: ln(Costs) = 6.49 − 0.23(ln Scale) − 0.33(ln Cummulative) − 0.31(ln Cap Util.). Note that one of the independent variables in the regression is not significant. However removing it might introduce omitted variable bias so it is best to just leave it in because the other coefficients are unbaised but just less efficient. • Cost Differential: Dupont, 22.6 ∗ 2−0.23 ∗ 2−0.33 ∗ 0.77−.31 = 16.58. Rivals, 24.6 ∗ 20 ∗ 20 ∗ 0.87−.31 = 25.69. Differential, 25.69 − 16.58 = 9.11. Which would seem to justify an expansionary growth path. • Discount rates: The rate at which we must discount the NPVs of...