Case Study: Du Pont Freon Products Division
The Du Pont Freon Products Division’s main business is production and sale of chlorofluorocarbons (CFCs) which are mainly used in refrigeration equipment and air conditioning systems. In 1987, the division accounted for two percent of Du Pont’s revenue and employed 1200 people. Starting in the early 70s, concerns have been expressed that CFCs contribute to and might cause the depletion of the ozone layer. In 1988, however, the first hard evidence was published proving that CFC causes the ozone layer to deplete. This contribution to the depletion is, according to the evidence, widespread and more severe than originally believed. In face of the new evidence, Joe Glas, CEO of Du Pont Freon Products Division needs to decide what the future of the companies CFC business is going to be. In order to derive the decision, this essay will first look at Du Pont’s Strategy regarding the CFC business from 1974 to 1986 and afterwards consider the impacts of the Montreal Protocol and the Trends Panel Protocol. Evaluation of Du Pont Freon Products Division from 1974 to 1986 As an overall overview, it can be depicted that Du Pont Freon’s strategy is not very clear and obvious and has changed at least once during the indicated period, especially regarding the company’s political strategy. It appears as if Du Pont Freon did not really know in which direction they wanted to evolve, due to failing assessment of market development and general uncertainty in the market. In the following, the company’s marketing and research strategy will be briefly analyzed, followed by an assessment of the political strategy. Du Pont Freon’s marketing strategy is based on the company’s generic positioning as low-cost manufacturer. This, however, led to the fact that after tax operating income was very low for the division’s price sensitive products. After-tax operating income for two of the division’s main products CFC-11 and CFC-12 was only 1.6% of sales in 1974 and only increased to 3% of sales by 1979. When the United States prohibited CFCs in aerosols, the company’s CFC business declined by one third. The company’s efforts to raise prices were not successful. By effectively threatening suppliers, claiming Du Pont wanted to engage itself in chlorocarbon production, Du Pont Freon could, however, attain lower prices, which increased after-tax operating income to 4% in 1984. After the Montreal Protocol was passed in 1988, the company stuck to its cost leader strategy and rejected a short-term maximization strategy. The company aimed at mitigating the regulatory effects, in order to keep price-sensitive customers in the market. Since Du Pont Freon planned to introduce substitutes for CFC, the company wanted price-sensitive customers to be there when the new products will be introduced. With regard to the company’s research strategy it needs to be said that research has been tightly correlated with the threat of governmental regulations. Whereas investments in research and development (R&D) were high in the 70s, they were reduced to practically nothing during the first half of the 80s, since further regulations seemed unlikely and the need for substitutes therefore was apparently lowered. When new evidence became available in the mid-80s, CFC debates reached their peak, resulting in the Montreal Protocol which will be discussed later. The new basic conditions led Du Pont Freon to increase its expenditures on R&D for substitute research again. The political strategy and the positioning of Du Pont Freon during that period has been shady and changed over time. One of the central mission statements of Du Pont, heavily publicized in the 70s is “If we can’t make it safely, we won’t make it at all!” In relation to this campaign, Du Pond CEO also promised publicly that the company would stop the production of ozone depleting products if hard evidence of this became available. After the concerns about CFC had been...
Please join StudyMode to read the full document