9-809-012
AUGUST 5, 2008
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Professor Richard S. Tedlow and Research Associate David Ruben prepared this case. This case was developed from published sources. HBS
cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
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RICHARD S. TEDLOW
DAVID RUBEN
Du Pont: The Birth of the Modern Multidivisional
Corporation
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 war-triggered 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 single-industry 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.1 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.2
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.3 The problem
seemed to be self-inflicted. 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
1 There was only one large, integrated paint enterprise at that time—Sherwin-Williams, a firm which is still in business today.
2 Alfred D. Chandler, Jr., Strategy and Structure: Chapters in the History of the American Industrial Enterprise, Cambridge,
Massachusetts: The M.I.T. Press, 1962, p. 92.
3 Strategy and Structure, p. 92.
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809-012 Du Pont: The Birth of the Modern Multidivisional Corporation
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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.
The young managers’ proposal was so revolutionary that it was initially dismissed by company
president Irénée du Pont. But when a severe macroeconomic downturn amplified Du Pont’s growing
pains into full-fledged crisis, the firm’s leadership finally agreed to adopt the restructuring plan. And
the modern multidivisional company, a staple of corporate existence ever since, was born.
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,4 established a gunpowder factory on
the banks of the Brandywine River near Wilmington, Delaware.5 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.6
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. Representatives of the member companies met regularly to determine
production quotas and prices and to arbitrate differences between or among members. To help
ensure compliance, Henry du Pont bought shares in most of the trust participants (i.e., his major
competitors). The strategy, which would not become expressly illegal until passage of the Sherman
Antitrust Act in 1890, proved effective. By 1881, the association was estimated to control 85 percent of
the U.S. gunpowder market.7 Du Pont pursued the same horizontal combination strategy for
dynamite, with similarly successful results.
Changing times and circumstances spelled the end of this cozy arrangement, however. In 1902,
company president Eugene du Pont died suddenly. With no obvious family successor waiting in the
wings, Du Pont’s directors made plans to sell the firm to the Laflin & Rand Powder Company, a firm
4 Frenchman Antoine Lavoisier (1743–1794) is known as “the father of modern chemistry.” A nobleman, he was guillotined in
the French Revolution. On his death, the mathematician Joseph-Louis Lagrange remarked, “It took them only an instant to cut
off that head, and a hundred years may not produce another like it.”
5 Du Pont may well be the oldest existing industrial firm in the United States. See Abrahm Lustgarten, “A Truly Old School
Bank,” Fortune, April 5, 2004, and Pap A. Ndiaye, Nylon and Bombs: DuPont and the March of Modern America, Baltimore: The
Johns Hopkins Press, 2007, p. 8.
6 Smokeless powder is a nitrocellulose-based propellant that became popular in firearms and artillery starting in the 1880s. It is
more powerful and cleaner-burning than the older gunpowder, or “black powder,” that it has largely replaced. Dynamite is a
nitroglycerin-based explosive that is widely used in the mining and construction industries. It was invented by the Swedish
chemist, engineer, and prize-creator Alfred Nobel in 1866.
7 Graham D. Taylor and Patricia E. Sudnik, Du Pont and the International Chemical Industry, Boston: G.K. Hall & Company, 1984,
p. 22.
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Du Pont: The Birth of the Modern Multidivisional Corporation 809-012
3
that, following the peculiar logic of cartelization, was both its chief competitor and closest ally. But
three young du Pont cousins, determined to keep the 100-year-old concern in the family, stepped in
at the eleventh hour and bought the company themselves.
What they inherited bore little resemblance to a modern-day business, however. According to
preeminent Du Pont historian Alfred D. Chandler, Jr., the company’s management
. . . had a powerful voice in how much other firms produced and at what price, but they knew
almost nothing about how each unit carried on its production and sold its quotas. Nor did they
particularly care. Neither the individual companies nor the Association paid much attention to
costs, to improving processes, or to developing more systematic purchasing and marketing
techniques….Effective administration was impossible because neither the separate firms nor
the combination itself had the information or methods to assure an efficient use of existing
resources and so to reduce unit costs and increase output per worker. They did not even have a
systematic way of gauging existing or potential demand on which to base their price and
production schedules.8
The old trade-association model had worked well for Du Pont—better, in fact, than similar
arrangements in many other industries—but it was hardly perfect. There were compliance issues:
Member companies sometimes kept two sets of books—one for the trade association or holding
company, the other with the real numbers—and secret rebating, special discounts, and similar
manipulations were rampant. What’s more, price and production agreements invited new entrants
into the industry that, even if economically unviable, had to be bought into by the industry leaders if
control was to be maintained.
Even when it was working smoothly, the old model had serious limitations. Under the association
approach, there was little incentive to reduce costs, replace inefficient plants, streamline marketing
and sourcing, or support research and development. The old guard had not worried about such
issues. The new generation, less tied to the old ways—and well aware of the government’s growing
legal scrutiny of trusts and cartels—did.
One of this new generation, Development Department head Arthur J. Moxham, argued that Du
Pont was actually better off controlling only a portion of the market:
If we could by any measure buy out all competition and have an absolute monopoly in the
field, it would not pay us. The essence of manufacture is steady and full product. The demand
for the country for powder is variable. If we owned all therefore when slack times came we
would have to curtail product to the extent of diminished demands. If on the other hand we
control only 60% of it all and made that 60% cheaper than others, when slack times came we
could still keep our capital employed to the full and our product to this maximum by taking
from the other 40% what was needed for this purpose. In other words, you could count upon
always running full if you make cheaply and control only 60%, whereas, if you own it all,
when slack times came you could only run a curtailed product.9
And so, aided by talented managers like Moxham, du Pont cousins Alfred, Coleman, and Pierre
set about remaking a chaotic nineteenth century, family-run trust—more a loose federation of small
firms, really—into a unified, professionally managed, twentieth century industrial enterprise.
8 Strategy and Structure, pp. 54–55.
9 Alfred D. Chandler, Jr. and Stephen Salsbury, Pierre S. du Pont and the Making of the Modern Corporation, New York: Harper &
Row, 1971, p. 93.
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809-012 Du Pont: The Birth of the Modern Multidivisional Corporation
4
First, the new owners had to figure out exactly what they now possessed. “We have not the
slightest idea of what we are buying,” wryly noted Pierre du Pont at the time, “but we are probably
not at a disadvantage as I think the old company had a very slim idea of the property they possess.”10
Then they dissolved the Powder Trust, bought out the shareholders in many of its former
members, and merged those firms, along with the ones that Du Pont already wholly owned, into a
single integrated corporation. In 1902, when the cousins had bought the firm, the du Pont company
itself had manufactured about a third of the nation’s powder. By 1905, thanks to consolidation and
centralization, the newly amalgamated firm’s market share had shot up to more than three-quarters.11
By 1906, Du Pont had dissolved some 64 corporations.12
Finally, to administer the newly consolidated enterprise, the cousins established a formal,
centralized management structure with clearly defined lines of authority and responsibility.
Explained Pierre several years later,
. . . we realized that if a good investment was to be made for us, it would necessitate a
complete reorganization of the method of doing business; that the administrative end would
have to be reorganized, numerous selling organizations, or administrative organizations done
away with, and we would have to establish a system of costs in order than an economical
manufacture could be installed throughout the business.13
The carefully crafted structure they adopted divided Du Pont into separate functional
departments controlled by an Executive Committee (see Exhibit 1). This arrangement served the
reborn company well, enabling Du Pont to exploit economies of scale to become the prohibitive
leader in its industry over most of the next two decades. Thus, it remained basically unchanged until
after World War I. In fact, Chandler notes, Du Pont’s centralized, functionally coordinated
organizational blueprint proved “admirably suited” to meet the needs of the firm’s sudden,
enormous growth resulting from the war in Europe.
At war’s end, the company’s structure seemed more ideal than ever. “By the summer of 1919, the
Du Pont Company was ready to meet the postwar world,” Chandler writes. “Few more rationally
planned and thoroughly tested designs existed for coordinating, appraising, and planning the
activities of a great vertically integrated industrial enterprise.”14
But the centralized structure that had served Du Pont so well during one strategic era would turn
out to be woefully inadequate for the next.
Diversification, World War I, and Reassessment
Du Pont’s rebirth as a consolidated, centralized enterprise was followed by its transformation
from single-industry explosives manufacturer to diversified chemical corporation. Though this
transition was largely undertaken after World War I, its seeds were planted several years before.
Spurred by fears of becoming both over-dependent on fickle government munitions contracts and too
10 Strategy and Structure, p. 55.
11 To be precise, Du Pont in 1905 made 64.6 percent of all soda blasting powder; 80 percent of all saltpeter and blasting
powder; 72.5 percent of all black sporting powder; 70.5 percent of all sporting smokeless powder; and, except for a small
amount made by the government, 100 percent of all military smokeless powder. Strategy and Structure, p. 406, n.11.
12 William H.A. Carr, The du Ponts of Delaware, New York: Dodd, Mead & Company, 1964, p. 241.
13 Strategy and Structure, p. 55.
14 Strategy and Structure, p. 78.
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Du Pont: The Birth of the Modern Multidivisional Corporation 809-012
5
easy a target for federal antitrust actions, the company in 1908 began to investigate possible
alternative uses for nitrocellulose, the highly flammable material that is the main ingredient in
military gunpowder.15 Two years later, the firm made its first significant venture into the non-
explosives consumer market by purchasing the Fabrikoid Company, the country’s largest
manufacturer of a nitrocellulose-based artificial leather. This was followed by a tentative foray into
the production of pyroxylin, another nitrocellulose compound that was used to make plastics
products such as combs and eyeglass frames; lacquers; and photographic film.
Despite these early steps toward diversification, explosives still accounted for all but 3% of Du
Pont’s business in 1913.16 It was the breakneck expansion of the company’s physical, financial, and
personnel resources during the war—and the realization that it would be impossible to sustain those
resources as a munitions company in peacetime—that drove the serious search for new product lines.
Thus the paradox that the outsized success of Du Pont’s core munitions business is what led the
company to transcend and ultimately abandon it.
It is difficult to overstate the magnitude of Du Pont’s wartime boom. The company supplied some
40 percent of all the powder fired by Allied guns during the war. At the beginning of the conflict, the
firm was producing about one million pounds of nitrocellulose, the key ingredient of the smokeless
powder that fed those guns, per month. By war’s end, it was turning out 1.5 million pounds per day.
Du Pont’s workforce soared from 5,300 in 1915 to 85,000 in 1918. Its accumulated surplus (earnings
after paying out dividends) during that same period rose more than sevenfold, from $9 million to $68
million. Between 1913–1916, the company’s net profits shot from $6 million to $82 million—more
than the combined profits of every year since 1902, when the three du Pont cousins had bought the
company.17
Even during the war, Du Pont anticipated the challenges it would face when the guns fell silent.
“It is hoped,” the company stated in its 1915 annual report, “that new manufactures will be
developed to take the place of the abnormal military business.” Or as company Treasurer John J.
Raskob put it, “After the war it will be absolutely impossible for us to drop back to being a little
company again; and to prevent it, we must look for opportunities, know them when we see them,
and act with courage.”18
Du Pont did aggressively search out and develop new capacities even as it was racing to meet the
soaring wartime demand for munitions. This expansion extended both horizontally and vertically. In
1915, Du Pont bought the Arlington Company, a manufacturer of a brand of pyroxylin called Pyralin.
In 1916, it purchased the Fairfield Rubber Company, which produced Fabrikoid-based products such
as rubber-coated automobile and carriage tops. That same year, it decided to enter the paint and
varnish business (whose raw materials closely matched Du Pont’s existing capabilities), buying the
large integrated paint firm Harrison Bros. & Co. In 1917, it bought the Marokene Company, which
made a key ingredient in Fabrikoid. It also built a laboratory in New Jersey to study and manufacture
synthetic dyes, a product whose chemistry was closely related to that of high explosives and a market
15 Nitrocellulose is made by treating cellulose with concentrated nitric acid. (Cellulose is the stringy, fibrous material that
forms the main constituent of the cell wall in most plants, and is important in the manufacture of paper, textiles,
pharmaceuticals . . . and explosives.) When used in gunpowder, nitrocellulose is also known as guncotton.
16 Strategy and Structure, p. 78.
17 Adrian Kinnane, DuPont: From the Banks of the Brandywine to Miracles of Science, Wilmington, Delaware: E.I. du Pont de
Nemours and Company, 2002, p. 79; William S. Dutton, Du Pont: One Hundred and Forty Years, New York: Charles Scribner’s
Sons, 1949, p. 261; Strategy and Structure, p. 84; E. I. du Pont de Nemours & Company Annual Report, 1919, p. 16; DuPont: From
the Banks, p. 76.
18 Ernest Dale, “Du Pont: Pioneer in Systematic Management,” Administrative Science Quarterly, Vol. 2, No. 1 (Jun., 1957), p. 46.
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809-012 Du Pont: The Birth of the Modern Multidivisional Corporation
6
that Du Pont had been exploring for several years.19 Also in 1917, Du Pont invested $25 million to
purchase 28% of the available stock in General Motors. Three years later, Pierre du Pont left the Du
Pont company to become that firm’s president.
Thus, by 1917 the company could report that,
We are encouraged to believe that very substantial progress has been made in the
development of industries that must eventually furnish a substitute for the military business
which the company now has on its books. The manufacture and sale of Fabrikoid, Pyralin,
Lacquers, Solvents and a variety of Chemicals have all developed and become a part of our
current business.20
In other words, DuPont’s management was in the process of making a fateful strategic decision:
investing the immense sums of capital it had made in the wartime explosives market to
metamorphose from a single-industry firm to a heterogeneous manufacturer and purveyor of
plastics, dyes, paints, and other elements of the emerging consumer and high technology markets.
* * *
This brings us back to 1919, when this carefully planned, well-financed diversification should
have been paying handsome dividends, but wasn’t; when the company asked a committee of junior
executives to figure out why; and when that committee concluded that the problem was the firm’s
basic structure.
The five-man committee—actually a sub-subcommittee—began its work in the fall of 1919 (see
Exhibit 2). In addition to closely examining their own company, its members interviewed managers
at other prominent industrial enterprises, including Armour, International Harvester, Aluminum
Company of America, and Procter & Gamble. After six months, they issued their final report.
The committee began by rejecting the notion that Du Pont’s new ventures might be falling prey to
macroeconomic forces, since its competitors (many of whom, unlike Du Pont, were actually making
money) had “no advantage over us in the purchase of raw materials, and no secret process, no
patents preventing us from using the best method of manufacture.” As a result, the committee
concluded, “the factor or factors making this great difference . . . are entirely within ourselves.”21
In further studying the problem, the committee noted that although the firm’s functional
departments were effectively managed, its organizational structure meant that there was no single
person overseeing the operation of any particular product line. In Du Pont’s paint operation, for
example, the committee reported that, “we have been unable to find the exact responsibility for
profits.”22
So the committee turned its attention to Du Pont’s organizational framework—the unitary, or
U-form structure that had been adopted in 1904 as the keystone of the newly consolidated,
centralized enterprise. That framework, the committee agreed, had served the company well over the
19 The facility, the Jackson Laboratory, was located in Deepwater, New Jersey, just across the Delaware River from Du Pont’s
home base of Wilmington, Delaware.
20 E. I. du Pont de Nemours & Company Annual Report, 1917.
21 Strategy and Structure, p. 95.
22 Strategy and Structure, p. 96.
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Du Pont: The Birth of the Modern Multidivisional Corporation 809-012
past decade and a half. But—and this was their crucial insight—objectives change, and when they do,
structures must adapt. The same formation that enabled a company to successfully execute one
strategy might wind up hindering another. Noted the committee almost philosophically: “We have
forced the company’s business into artificial channels instead of arranging that the business could
adapt itself to what might be described as its natural course. It makes no difference that when the
limits were fixed they were truly the best limits, for owing to the law of change of all living things,
necessarily those limits would be different the next minute.”23
In other words, Du Pont’s existing structure—with its centralized manufacturing, sales, and
purchasing departments that served all units—had worked well as long as those units were few in
number and closely related. But that was no longer the case.
The essential difficulty was that diversification greatly increased the demands on the
company’s administrative offices. Now the different departmental headquarters had to
coordinate, appraise, and plan policies and procedures for plants, or sales offices, or
purchasing agents, or technical laboratories in a number of quite different industries. The
development of plans and the appraisal of activities were made harder because executives with
experience primarily in explosives were making decisions about paints, varnishes, dyes,
chemicals, and plastic products. Coordination became more complicated because different
products called for different types of standards, procedures, and policies. For although the
technological and administrative needs of the new lines had many fundamental similarities,
there were critical dissimilarities.24
For example, paint, which was sold to retailers or ultimate consumers through a network of small
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