Du Pont: the Birth of the Modern Multidivisional Corporation

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Du Pont: The Birth of the Modern Multidivisional Corporation HARVARD BUSINESS SCHOOL August 2008

RICHARD S. TEDLOW DAVID RUBEN

The year 1919 should have been a very good one for E. I. du Pont de Nemours and Company. World War I had blessed the 117-year-old, Delaware-based explosives manufacturer with the kind of booming growth that only an arms-maker in a global conflagration can dream of. The company had then leveraged this wartriggered glut of cash, plants, and personnel to accelerate its long-planned expansion into dyes, paints, plastics, and other new chemical-related ventures. Du Pont believed that transforming itself from singleindustry explosives firm to diversified chemical combine would prove a winning strategy in the post-war era. Except it didn’t work out that way. Du Pont’s new lines performed poorly. Profits in plastics plunged. Despite the investment of millions of dollars, the dye operations lost money. So did the company’s chemical ventures. Paints and varnishes were a particularly troubling area. Du Pont had expected that the economies of scale made possible by its large size and vertical integration would quickly propel it to leadership in an industry made up mostly of small, nonintegrated firms. And in fact sales had soared but so had losses. In 1919, gross paint and varnish sales rose 38%, to $4 million, from the previous year, but losses, nearly half a million dollars, were up an even greater 52%. “The more paint and varnish we sold, the more money we lost,” noted an internal report. Du Pont’s new ventures were lagging not only the company’s own targets, but the performance of its competitors in those industries, as well. 1919, for instance, was one of the most profitable years ever for many of the smaller paint companies that Du Pont had expected to surpass. The problem seemed to be selfinflicted. But what was it? To find out, Du Pont formed a committee to assess the situation. It was made up of junior executives with operational responsibilities in the company’s major departments. The committee began by examining the new lines’ marketing shortcomings, which were considerable. The closer they looked, however, the more their focus broadened. Finally, after six months of study, these young middle managers arrived at a far reaching and unexpected conclusion: The root cause of the problem was the core structure of the company itself. The solution they suggested was no less sweeping. Du Pont’s centralized, functionally departmentalized structure—the same structure which the company had adopted with great care less than two decades before, which had served Du Pont so well through World War I, and which was still considered the state of the art for a great vertically integrated industrial enterprise—should be blown up. In its place, the junior executives proposed that the company adopt a novel, decentralized configuration – one that was without precedent in an American industrial firm.

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Consolidation and Centralization To understand fully the nature and significance of Du Pont’s historic transformation, it helps to start at the beginning. For Du Pont, that comes in 1802, when French émigré Eleuthère Irénée du Pont, a former apprentice to famed chemist Antoine Lavoisier, established a gunpowder factory on the banks of the Brandywine River near Wilmington, Delaware. The company flourished as a family owned and run firm, supplying both government and private sectors with gunpowder and, by the end of the nineteenth century, the newly developed technologies smokeless powder and dynamite. After the Civil War, however, the fast-growing and increasingly competitive explosives industry was plagued by overcapacity and declining prices. Du Pont responded to this threat in typical nineteenth century fashion. It formed a cartel. Under the leadership of Henry du Pont, the Gunpowder Trade Association, more popularly known as the “Powder Trust,” was created in 1872 to control price and production....
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