From Commodity to Specialty Chemicals: Cellulose Products and Naval Stores at the Hercules Powder Company, 1919-1939 Davisdyer and David B
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From Commodity to Specialty Chemicals: Cellulose Products and Naval Stores at the Hercules Powder Company, 1919-1939 DavisDyer and David B. Sicilia 1 The WinthropGroup Considerthe following"snapshots" in the life of the HerculesPowder Co. of Wilmington,Delaware: In 1919Hercules' total sales were $20.5 million. More than99 percent of theserevenues came from a singleline of business:commercial explosives, includinggunpowder, smokeless powder, blasting powder, and, especially, dynamite. These productswere sold to mine and quarry operators, constructionfirms, and the generalhardware trade, and were, for the most part,indistinguishable from products offered by leading competitors. Hercules managedits assetsthrough a singleoperating department. The company maintaineda small "ExperimentalStation" on the groundsof one of its dynamiteplants to servethe researchand testing needs of the entirecompany. This stationoperated on an annualbudget of about$180,000, a total of less thanone percent of sales.The companyheld four patents and had ten patent applicationspending. Two decadeslater Hercules'sales exceeded $41 million. The company nowproduced more than two hundredproducts ranging from explosivesto a varietyof cellulosicand rosin-based compounds, paper chemicals, insecticides, andsynthetic resins. Most of theseproducts were highly specialized; indeed, mostwere developedwith particularmarket niches in mind and usuallyin close cooperationwith key customers. In 1939 Hercules conductedits businessthrough six operating units. To supportthese activities the company reliedon a centralresearch laboratory near the corporateheadquarters in Wilmington,Delaware, with an annualresearch budget of nearly$1 million (or about2.5 percent of sales).Hercules held more than 600 patents and had morethan a hundredapplications pending. As thesesnapshots suggest, Hercules changed dramatically during the interwaryears. This transformation, of course,occurred against the backdrop of fundamentalchanges in theworldwide chemical industry and similar (even more dramatic)changes at otherchemical companies. In the two decades after1910 the modernU.S. chemicalindustry was born: processtechnology 1Thispaper isbased onour forthcoming bookLabors ofa ModernHercules: TheEvolution ofa ChemicalCompany (Boston, 1990). The paper draws primarily from chapters 5 through 7 of the book. In additionto the referencesbelow, we reliedheavily on monthlyand annual departmentalreports made to the board of directorsand/or the executivecommittee at Hercules. These reportsare housed at the HerculesIncorporated Hall of Recordsin Wilmington,Delaware. We aregrateful to ProfessorJohn Kenly Smith, Jr. for hiscomments on this paper at the BusinessHistory Conference. BUSINESS AND ECONOMIC HISTORY, SecondSeries, Volume Eighteen, 1989. Copyright(c) 1989by the BusinessHistory Conference. ISSN 0849-6825. 59 shiftedfrom simple mixing of materialsto highvolume, continuous processing of complexchemicals; plants became larger, more sophisticated, and more capitalintensive; products became more rigidly standardized and controlled; modern,centralized R&D labswere established;and leadingcompanies diversifiedto offer a widevariety of products[5,6]. We arelearning agood deal about the chemical industry in thisperiod, thanksin part to the recenthistory of R&D at Du Pont by David A. Hounshelland John Kenly Smith, Jr. [14]. Drawingon thiswork, as well as hisown pioneering research, Alfred D. Chandler,Jr. has argued that Du Pont setthe most common pattern of growthfor largecompanies in the chemical industry[2]. Du Pontdiversified out of explosives,first into downstream applicationsofnitrocellulose (a primary ingredient ofsmokeless powder) such ascoated fabrics and celluloid plastics and films, and then into a widevariety of basicchemicals. The companymaintained operations in at least ten differentproduct lines by 1931. Accordingto Chandler,other large chemicalcompanies generally' followedsuit. AmericanCyanamid, Dow Chemical,Monsanto, and Union Carbidediversified from theirbase product lines into relatedareas in the 1920s. As Chandler'slatest research shows, these companies succeeded by exploitingeconomies of scale and scope [1]. Newchemical processes required companiesto buildlarge, capital-intensive facilities. To operatethese plants efficientlyand maintain throughput, producers typically integrated forward to developnew applications, and/or backward to assurea steadysource of raw materiMs. As companiesreached the limitsof growththrough vertical integration,they sought to diversifyinto related product lines. In the 1910s andearly 1920s, the modeof entrywas typically acquisition; in the 1930s, however,some companies (again led by Du Pont) increasinglyrelied on internaldevelopment and invested heavily in R&D to fuelprofitable growth. In manyrespects, the interwar history of HerculesPowder Company is an apt illustrationof Chandler'sscale and scope thesis. Hercules, like Du Pont,sought to findpeacetime applications for wartimetechnology, skills, andassets. Like Du Pont,Hercules first diversified by exploringpossibilities in an existingtechnology (nitrocellulose chemistry). Again like Du Pont, Herculesquickly saw the limits of sucha strategyand sought to diversifyinto otherproduct lines. Beyondthis, however, the similarities between the two companies end. In its diversifiedbusinesses, Hercules followed a differentpath to growthand arrivedat a differentdestination. Lacking the resources, research capabilities, and"first mover advantages" of its giant rival, Hercules faced limited options in celluloseproducts, and so diversified more cautiously and narrowly than Du Pont. Herculesconcentrated on a few keyproducts offered for specialized nichesrather than on a widearray of primaryand specialized chemicals and downstreamapplications. Hercules'other post-World War I venture,into navalstores, also contrastswith the diversificationstrategies of its largerrivals. Rather than attemptingto captureeconomies of scale and scope in itsexisting businesses, thecompany moved into an unrelatedarea in whichit possessedvirtually no chemicalexpertise, production facilities, marketing know-how, channels of 61 distribution,or customers.The companyeventually succeeded in thisline by pursuinga similarstrategy as in celluloseproducts: by upgradingcommodity productsthrough research, mounting an intensemarketing effort to identify profitableniches, and forgingclose ties with its customers--a strategy,in short,of competingas a producerof specialtychemicals. From Guncotton to Cellulose Products HerculesPowder Company was organizedin 1912to manageassets divestedby Du Pontas part of that company'ssettlement of a longantitrust trial. At its birth,Hercules was primarily a producerof dynamiteand black powder.During World War I, however,the companybecame a leadingmaker of guncotton(a highlynitrated form of nitrocellulose).Although Hercules startedwork on commercialapplications of nitrocellulosein 1917(including nitrocellulose-basedcoatings and plastics), success in thesemarkets came only after nearlyseven years of struggle. Severalreasons account for this delay. The first problemwas timing. Unlike Du Pont,Hercules did not diversifyduring the war itself. Rather,it waspreoccupied with scalingup and operatingits militaryordnance plants. Before1917, moreover, the companyhad limitedR&D facilitiesof its own; the court decreethat createdHercules in 1912 providedthat the company obtainR&D servicesfrom Du Pont for a periodof five years. The secondproblem was limited finandalresources. From 1917to 1920 Herculespursued an internaldevelopment strategy to find peacetime applicationsof itswartime technology. Ample funding supported such efforts duringthe war. After the Armistice,however, the companywas entirely dependenton the slumpingcommercial explosives business for its profits. As the economyentered a sharprecession, Hercules faced an unwelcomechoice: as treasurerand directorGeorge Markell put it, "eitherwe mustshow our stockholdersthat we areoperating at a lossor we musteliminate development andexperimental expenses other than those small enough to be absorbedeven by our reducedearnings" [11]. Giventhese alternatives, the boardvoted to abandonmost efforts to developnew commercial products from its wartime assets and to focus on other avenues of diversification. AlthoughHercules continued to producenitrocellulose after 1920 (the compoundwas still used in its explosivesbusiness), lack of investmentcapital wasa chronicconcern. For example,the physicalcondition of the company's lone nitrocelluloseplant in Parlin, New Jersey,was a frequentsource of frustrationto operatingmanagers. The plant had been constructedhastily duringthe war. One managerrepeatedly lamented Parlin's "general state of decrepitude"in the early 1920s,and pointedout that "veryextensive and elaboraterepairs" were necessary to keepthe plantin workingorder [10]. Stillanother problem was Hercules' approach to enteringthe business: the companywas slow to developa coherentstrategy. As a late-comerto the industry,the companyencountered stiff competition from entrenched players, includingmuch larger companies such as EastmanKodak and Du Pont. At the same time, Herculescould ill-afford to buy its way in via acquisition. Finally,it wasreluctant to integrateforward into nitrocellulose-based products. As cellulosechemist (and futureHercules president) Charles Higgins put it, a moreprudent course would be "torefrain from gettinginto a positionwhere we wouldbe our customers'competitors" [12]. Breakthrough In