Business Principles in brief.
keeping it simple and short
Monday, 24 June 2013
CASE STUDY: Smart Move by Dow Chemical
Dow founded Dow Chemical in Midland, Michigan when he invented a way to
produce bromine cheaply. He sold the chemical for industrial purposes
all over the US for 36 cents per pound at the turn of the 20th century.
He couldn't go overseas, however, because the international market was
controlled by a giant German chemical cartel that sold it at a fixed
price of 49 cents per pound. It was understood that the Germans would
stay out of the US market so long as Dow and the other American
suppliers stayed within its borders.
Eventually Dow's business
was in trouble and he had to expand. He took his bromine to England and
easily beat the cartel's fixed price of 49 cents per pound. Things were
okay for a while until a German visitor came to Michigan and threatened
Dow that he had to cease and desist. Dow didn't like being told what to
do and told the cartel to get lost.
Shortly thereafter German
bromine started appearing for sale in the US for 15 cents per pound, way
below Dow's price. The cartel flooded the US market, offering the
chemical way below their own costs, intending to drive Dow out of
business. But Dow outsmarted them. He stopped selling in the US market
entirely and instead arranged for someone to secretly start buying up
all the German bromine he could get his hands on. Dow repackaged it as
his own product, shipped it to Europe, and made it widely available
(even in Germany) at 27 cents per pound. The Germans were wondering 1)
why wasn't Dow out of business and 2) why was there suddenly such demand
for bromine in the US??
The cartel lowered its price to 12 cents
and then 10 cents. Dow just kept buying more and more, gaining huge
market share in Europe. Finally the Germans caught on and had to lower
their prices at home. Dow had broken the German chemical monopoly and
expanded his business greatly. And customers got a wider range of places
to buy bromine at lower prices.
Dow went on to do the same trick
to the German dye and magnesium monopolies. This is now the textbook
way to deal with predatory price cutting.