Why Invest in DuPont - Research Paper Example

? DuPont Case Study Table of Contents I. Introduction 3 II. Strategic Options 4 III. Company Strategy, Finances – Insights from Hindsight 5 IV. Strategy Recommendations 7 Works Cited 9 I. Introduction This paper provides an analysis of the DuPont case and recommends appropriate strategies and interventions to enable DuPont to rise above the problems stated in the case , related to the restoration of the competitive standing and prestige, as well as improving the level of performance of the firm to bring it up to par or better with what the company has achieved during its past peaks. The company is formally known as E. I. du Pont de Nemours and Company, or DuPont for short, and achieved incorporation in 1915. As the case notes, in the aftermath of the global financial crisis that struck from 2007 onwards, the world also crumbled for DuPont figuratively speaking, necessitating planning to prepare for scenarios where revenues fell anywhere from five percent to as much as 20 percent and beyond. The prospect of a company-wide decline in revenues was made even more palpable with the lead decline in revenues in a business segment involved in the production and sale of titanium dioxide. That initial prudence paid off somewhat, as the case notes, with ready plans for laying off 6500 employees when the scenario of revenues tanking by 20 percent became reality, even as the need to further trim the workforce by 2,000 employees more also became clear. Moreover, it also became clear that staff needed to take time off without pay, in order to realize cost savings of one billion dollars. Meanwhile, as the new CEO, there was the seen need to preserve the R&D budget at 1.4 billion dollars (Reuters; Case Facts). The case also notes that the company has fared poorly compared to competition in terms of returns on stock investments over the past 25 years, ranking in the last third, and the overriding concern is to come up with an appropriate strategy to change this dismal state of affairs. There are several options, one being either to continue with the current focus on chemistry and chemicals, another being diversifying focus from a few grand plans to many smaller bets and plans and then later on focusing on those plans and bets that “pop” so to speak. From an operational point of view, strategic options include putting emphasis on either people, the development of products, or the state of the company's finances and financial standing. Finally, as discussed above, the strategic direction dilemma involves either going on with focusing on one chief goal and one strategy for the whole firm, or diversifying the focus, so to speak, and substituting many different goals for different aspects of the organization in place of that one laser-focused goal, as is currently the case (Case Facts; Reuters; Google; Lewis; DuPont). II. Strategic Options As discussed above, the strategic options include retaining the company's focus on chemicals and on its current lines of businesses, or diversifying and splitting the bets so to speak, directionally and in terms of investments and focus, expanding the focus areas and being in a sense opportunistic and on the watch for new revenue streams and sources of revenue growth and profits. There is not much sense it seems in staying the course. First, compared to competition, the company has not fared well in terms of returns over the past 25 years. Moreover, the financial crisis has just made it clearer that staying where they are would not get them out of the steep revenue drop hole that they found themselves in. In other words, keeping the focus on chemicals and the current lines of business would mean jeopardizing the very existence of the firm. The crisis brought to the surface the need for change. Diversification into many other areas seemed a wiser course of action. On the other hand, this does not come without risks. There needed to be prioritization in terms of research and development focus. Moreover, the compromised revenue position of the firm meant that they could not possibly go into diversification mode without incurring further risks. The global financial crisis meant also that funds to diversify would not be easy to source, would be expensive, and would constitute further exposing the company to risks and possibly large leverage and debt (Case Facts; Reuters; Google; Lewis; DuPont) III. Company Strategy, Finances – Insights from Hindsight It is worth noting that on hindsight, the case facts reflect the reality of how the financial crisis that hit the world in 2007 and 2008 had adverse and severe impacts on the company's finances and prospects, as measured by the investor sentiments reflected in share prices during that time. Looking at the share prices from that period, before that and after, it is clear that the steep drop in share prices during that time reflected the dire situation that DuPont found itself in, as reflected in the case. There was not just a need to trim costs and expenses by a billion, as has been done in the case, but clearly too that the drop in revenues necessitated a drastic rethinking of where the company is headed, what it stood for, and how it could bolster revenues and profits moving forward. On the other hand, looking at the share price performance from 2009 onwards, one can also see that Du Pont must have done something right to steer itself to calmer waters, as evidenced by the less steep but sustained rise in share prices from the lows in 2008 to the middle of 2011, when share prices reached historical highs for the ten-year window examined. Fast forward to 2013, and share prices have hovered near those ten-year highs, indicating some measure of stability and the achievement of some success from the lows that were discussed in the case (Google): Graph Source: Google Moreover, looking at the company's lines of businesses at present, one can see some measure of diversification away from a pure focus in chemicals, as has been discussed in the case, into a number of related areas making up a more robust portfolio: Electronics/Communications; Pharmaceuticals; Nutrition and Health; Chemicals; Performance Coatings, Materials and Chemicals; Protection and Safety; Agriculture; and Industrial Sciences. 2011, meanwhile, saw a tremendous level of acquisition activities, in electronics as well as in solar cells, together with acquisitions in food ingredients, all seeming to reflect a further diversification and growth strategy (Reuters; Google Finance). The company's assessment of its own activities and strategies reflect this diversification strategy too. It sees itself, from a bird's eye view, as being in the core businesses of energy, protection and food, riding the wave of these three segments in what DuPont terms as megatrends in the business world and in the development of the global economy as well. The pillars of the strategy around these core focus areas are innovation that is led by the market, cost leadership, and making working capital work very hard to generate returns and to fuel the growth and profitability of the firm. These megatrends moreover, are said to be fueled by the natural growth in the population, something that is expected to lead to organic growth in the focus areas moving forward. Taking a step back, on the other hand, it is worth noting that the extent of the success of the innovation and the diversification work is reflected in the fact that US 10 billion dollars in revenues came from lines of businesses, products, and brands that were evolved just from 2007 onwards, meaning that they were the result of new innovation and newly developed businesses rather than coming from existing businesses prior to the time window considered (DuPont; Case Facts; Reuters; Google). IV. Strategy Recommendations The cost containment strategy that focused on cutting staff to cut salary and related costs by a billion dollars is wise. This prepares DuPont to restructure and to reposition itself, as well as to prepare itself for difficult times. The paring down of staff is also implied here to reflect reductions in revenues in some business segments. On the other hand, while the move to preserve research and development spending at status quo levels, there needs to be a rethinking with regard to what the focus areas of the R&D should be. As discussed above, the only viable strategic option moving forward, with the goal to ramp up revenues and profits and to improve on the historical weakness of the company's financial performance relative to competition, is to be able to diversify into many new growth areas. As DuPont explains, that is indeed what the company did. It took a step back and looked at the next waves of growth, and identified several megatrends that the company could ride on. The megatrend in energy meant the company diversified and placed bets in that area, together with food and protection. That is a sound strategy, and on hindsight one can see that the diversification and growth strategy has served the company well. Moving forward the key to profitable growth will be to continue on this path of diversification and acquisition, as well as retaining focus on cost control and on research and product development (DuPont; Case Facts; Reuters; Google). Works Cited Case Facts. DuPont. “Why Invest in DuPont”. DuPont.com. 2013. Web. 18 April 2013. Google. “E. I. du Pont de Nemours and Co (NYSE: DD)”. Google Finance. 2013. Web. 18 April 2013. Lewis, Scott. “E. I. du Pont de Nemours and Company”. Gale Directory of Company History. 2013. Web. 18 April 2013. Reuters. “E. I. du Pont de Nemours and Co (DD)”. Reuters.com. 2013. Web. 18 April 2013. Read More