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From to Specialty Chemicals: Products and at the Hercules Powder , 1919-1939 DavisDyer and David B. Sicilia 1 The WinthropGroup

Considerthe following"snapshots" in the life of the HerculesPowder Co. of Wilmington,: In 1919Hercules' total were $20.5 million. More than99 percent of theserevenues came from a singleline of business:commercial , includinggunpowder, smokeless powder, blasting powder, and, especially, dynamite. These productswere sold to mine and 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 research and testing needs of theentire company. 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 -based compounds, chemicals, , andsynthetic . 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 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 and similar (even more dramatic)changes at otherchemical . 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 . In additionto the referencesbelow, we reliedheavily on monthlyand annual departmentalreports made to the board of directorsand/or the executivecommittee at Hercules. These reportsare housedat 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 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 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,, and Union Carbidediversified from theirbase 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 ,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 ( ). Again like Du Pont, Herculesquickly 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, know-how, channels of 61

,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 . 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 physical condition of the company's lone nitrocelluloseplant in Parlin, ,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 the early1920s Hercules thus competed as a merchantproducer of nitrocellulose,using spare capacity at Parlin to supplymany gradesand viscositiesto producersof celluloidplastics, photographic film, artificialsilk, coatedfabrics, and tough materials such as linoleum. Because competition in mostof thesemarkets was keen, Hercules focused such development as it could afford on the more slowlyevolving market for nitrocellulose-based . Althoughmany and chemicalcompanies recognized the superiorqualities of nitrocelluloseas a film-formingingredient, a keytechnical problemstood in the way of commercialsuccess: lacquers that were thin enoughto be appliedeasily did not containenough nitrocellulose to form durable films. Researchersat Du Pont in 1920at last solvedthis problem and in the followingyears successfully developed low-viscosity nitrocellulose lacquers for mass-producedgoods such as appliances,, and, especially, automobiles[14, pp. 139-43].Du Pont'sapproach to loweringthe viscosity of nitrocellulosecame as the final stepin the manufacturingprocess, after the compoundwas purified and it existedin solution.At thispoint it wastreated witha hydrolyzingagent under pressure to reduceits viscosity. This approach, however,tended to re-introduceimpurities that coulddiscolor or causespots in fine lacquersand . In 1923, under the proddingof Higgins, researchersat Hercules found a way to avoid this problem by lowering viscosityduring the process. The basicinsight was to combine viscosityreduction with the purification of freshly-nitratedcotton. At thesame time that it washedacids and otherimpurities away, the Herculesprocess "digested"the nitrocottoninto a low-viscositysolution. The result was a productof uniformlyhigh quality [19]. Herculesquickly found itself an enviableposition as a low-costsupplier of a premiumproduct in highdemand. By 1925Parlin was operating around thedock to keeppace with orders.Hercules stepped up its investmentsin the facility, spendingseveral million dollars to replace temporarywooden structuresand increasecapacity, and became the largestmerchant producer of nitrocellulosein the United Statesin the ensuingdecade. Its advantages of scalehelped drive many smaller producers from the businessand persuade somekey customersto ceasecaptive production. In supportof its strategyto captureeconomies of scale,Hercules integratedbackward into chemicalcotton (purified cellulose)to assurea steadysupply of highquality raw materials by acquiringthe Virginia Cellulose Companyof Hopewell,Virginia in 1926.Hercules' engineers at the sametime continuedto pressthe cornpany'stechnological advantage, finding ways to increasescale and throughput and improve the safetyof operationsat Parlin. In 1929, for example,M.G. Milliken developeda continuoussystem of nitrationand digestion, a stepthat automatedmaterials-handling and resulted in greaterefficiency and lower levels of personalinjuries.

A Strategyfor CelluloseProducts

In 1928 the expansionof Hercules'new businessesprompted the companyto reorganize into a multi-divisionalstructure, with separate operatingdepartments for explosives,cellulose products, chemical cotton, and naval stores (see below). This new organizationwas similar to the decentralizedstructure adopted by Du Pont in 1921. At the sametime, President Russell H. Dunham set in motion a train of events that would culminatein the establishmentof a new, centralizedresearch facility in Wilmingtonin 1931. These organizationalchanges did not signal a commitmentto continuingdiversification, however. In the new CelluloseProducts Depart- ment,the company'slone product was nitrocellulose, of whichlacquer grades accountedfor nearlytwo-thirds of outsidesales in the late 1920sand early 1930s.(The otherthird went to producersof photographicfilm, plastics,and coatedfabrics.) Thereafter,several factors combined to encouragea more general approachto developingcellulose chemistry. First, Hercules' cellulose products businessessuffered terribly during the Great Depression.All end-useswere affected,but none so dramaticallyas lacquersbecause the Depression devastatedthe automobileindustry. At the sametime, New Deal price supportsfor cottonfarmers served to raise the costof celluloseproducts derivedfrom cotton linters, such as those made by Hercules,as compared to competitivematerials [7, pp. 286-87]. A secondproblem-- at first maskedby the Depression--was increasing productsubstitution. The initial threat came from celluloseacetate, which dislodgednitrocellulose in manyfilm andplastics applications starting in the mid-1920s. Even more alarmingwere new substitutesfor nitrocellulosc lacquersin industrialfinishes. In the early 1930s,for example,Ford and Chryslerswitched from nitrocelluloselacquers to formulationsusing alkyd resins,as did manyappliance manufacturers [6, vol. V, p. 347]. To meet thesethreats effectively, Hercules was forced to re-evaluate itsnitrocellulose business. In particular,the company adopted a four-pronged strategyto defendand improveits position. First, it significantlyincreased its commitmentto R&D in the department.Second, Hercules diversified to make celluloseproducts other than nitrocellulose. Third, the company defendedits positionin the protectivecoatings industry by providinghigher levelsof technicalsupport and . And finally,Hercules cultivated new marketsfor its specializedcellulose products. Along the way,the company movedbeyond into the worldof specialtychemicals. Despitethe opening of thenew, centralized Experiment Station in 1931, Herculesfor severalyears continued to conductR&D workas if it werestill an explosivescompany. The seniormanagers of the Stationhad been trained as explosivesengineers, for whomresearch consisted primarily of analytical functionssuch as testing and sampling of materials,and occasional problem- solvingor work on new explosivesformulations. At the sametime, however, a groupled by Higgins(now a vicepresident and member of the Executive Committee),George Norman (Technical Director), and analyticalchemist O.A. Pickettwas impressed with the centralized research activities of Du Pont, AT&T, General Electric, and General Motors. These men believedthat Hercules'would have to followsuit, given the increasinglytechnical content of its businessesand the needto developnew products to offsetcompetitive threats. In the springof 1933 this group used the failure of a major developmentprogram for a new explosivesprimer to force a changeof leadershipat the Station,where Pickett became acting director [20]. Thischange heralded a freshapproach to researchand development at Hercules.The Stationwas reorganized to encouragemore basic research and promotecloser coordination of activitiesin the laboratorywith semi-scale operationsand the commercialplants. Herculesalso startedto recruit scientistsfrom the bestuniversities. By the mid-1930sthe Stationboasted severalrenowned cellulose , including Drs. Emil Ott and Harold Spurlin. In additionto their ownsubstantial contributions, Ott, Spurlin,and otherskept a closewatch on developmentsin cellulosechemistry in Europe. Thesenew research personnel helped the company develop a seriesof new celluloseproducts in a quickburst of activityduring the mid- and late 1930s. The first of these was cellulose acetate. In the summer of 1936 Herculeslicensed I.G. Farbenindustrie'smanufacturing process and built a plant at Parlin with an annualcapacity of 2.4 million pounds[16]. Soon thereafter,Hercules began making other celluloseproducts, such as ethyl cellulose,cellulose acetobutyrate, and cellulose acetopropionate, often under licensefrom Europeanproducers, and with specific markets in mind. In additionto offeringnew products,Hercules sought to defendand improveits positionwith key customersin the protectivecoatings industry. Thisindustry was in themidst of a chemicalrevolution in the 1930s:coatings wereno longersimple products mixed and stirred on siteby the user,but complexmixtures of ,, resins, plasticizers, agents, and otheradditives formulated to meetspecific requirements. As the technical complexityof coatingsincreased, so did the need for standardizedand controlledingredients. Herculestook advantage of the opportunitiescreated by the coatings revolutionto strengthenits ties with key accounts.Advertising focused on Hercules'technical capabilities and achievements.In 1936 the company starteda new magazine,The Hercules , aimed at keepingcustomers abreastof new developmentsin the coatingsindustry. At the sametime, Hercules launched an annual "Industrial Finishes School" for coatings manufacturers.Such moves soon paid off. "Weare convinced,"said Milliken (nowgeneral manager of CelluloseProducts), "from many opinions of our customers,that our presentmethod of distributionof technicalinformation acceleratesthe useof ourproducts and has created a tremendousamount of goodwill towardour company"[8]. The companyalso looked outside cellulose chemistry for productsthat wouldappeal to thecoatings industry. Chlorinated rubber, an additivefirst 65

developedin Germanyto improvepaint's resistance to hazardousconditions, provedto be an extremelysuccessful product for Herculesafter 1934. Finally,the companyadapted its approachin the coatingsindustry to other customers. By the end of the 1930s Hercules nitrocellulosewas becominga valuableingredient of printinginks, , and even sausage casings;cellulose acetate was appearing in artificialfibers, films, and powders;and ethyl cellulosewas findingapplications in coatingsand as an electricalinsulating material. In 1937, Milliken describedHercules' new celluloseproducts strategy (whichthe companypursued for the nextfive decades)in thisway:

It is not our intentionto concentrateon anyspecific cellulosic material:rather, the objectis to makeavailable a wideselection of cellulose materials so that each manufacturer can determine whichproducts best meet his requirements.Technical service is availablefor all celluloseproducts. In thisway, the individual manufacturer has at his command a fund of technical data and backgroundto help in evaluatingeach cellulosicmaterial accordingto specificneeds. Active research work is continually being done on a large scalein an effort to searchout and producenew cellulosicmaterials with practicalproperties, as well as new applicationsof the presentproducts [17].

In otherwords, cellulose products had become a specialtychemicals business.

Unrelated Diversification into Naval Stores

As we haveseen, opportunities for Herculesto diversifyby buildingon itstechnical, production, and marketing base in explosivesand cellulosics after the war-- that is, to captureeconomies of scope--were limitedin the early postwarperiod. But the companystill had the resourcesand desireto diversify,even if thismeant entering unknown territory. Hercules approachedthis diversificationchallenge seriously and systematically.In Februaryof 1919the companysummoned its managersto a meetingin AtlanticCity to discussa strategyfor the future. At the same time,it establishedthe IndustrialResearch Department (IRD), chargedwith the taskof investigatingpotential new lines of business[12,23]. The IRD's resourceswere impressive: an annualbudget of $250,000and seventeen of the company'smost seasoned,talented, and ambitious professionals.The groupincluded engineers of all types,some with expertise •n functional areas (maintenance,traffic, accounting),and many knowledgeablenot onlyin aspectsof explosivesmaking, but alsoin unrelated industriessuch as ,paper, , and railroads. The IRD wasgiven a clearlydefined mission: to identifya candidatefor acquisition.Since the goal was long-term growth, the candidatewas to be a manufacturerof primaryproducts in a healthy,promising industry. But it wouldnot be in a businesscompetitive with consumers of explosives.Finally, Herculeswanted a goodbuy. For thisreason, a company"limping badly or badlywounded" due to under-capitalization,poor plantmanagement, inept marketing,or otheradministrative weaknesses was considered an idealtarget. As NormanRood, head of the IRD, explained,"It is the opportunitywe want morethan just the business... We [have]a verybroad field beforeus" [23]. This mandatewas striking in severalrespects. At the creationof the IRD, there was little discussionabout buildingon the company'sstrengths in existingproduct lines. Rather, Hercules believed it could acquire a flounderingcompany, improve its productionand marketingwith its own managers,and overcomethe problemsassociated with undercapitalization with its financialclout. The choiceof industryseemed secondary. Despiteits broadly-defined mandate, the IRD almostimmediately focused its attentionon a specificindustry and company.The industrywas naval stores(producers of rosin,, and other products gleaned from ). The companywas the Yaryan Rosin & TurpentineCo., which operated plants at Brunswick,Georgia, and Gulfport, Mississippi. To be sure, the IRD considereddozens of possibleventures, from pharmaceuticalsand artificial to Oriental rug power looms and automobileheaters. But therewere severalreasons why it quicklygrasped the navalstores opportunity, and neverlet go. From colonialtimes through most of the 19thcentury the industryhad been characterizedby thousands of small-scale producers whose uncoordinatedefforts, combinedwith the vicissitudesof weather, caused productionlevels and prices to fluctuatewildly from year to year. With little capital,many of thethousands of smallproducers were regularly wiped out by lean harvestsor low prices. This beganto changeby the end of the 19th century. Concernabout widespread arose in the industry(as well as the nation). A lessharmful way of tappingtrees (called the cup-and- gutter method)ameliorated some of the damage,but loggers,settlers, and fires marchedon relentlessly.By the turn of the century,many seriously questionedthe futureof the navalstores industry [3, 18, 21, 24]. But a new technologyoffered hope. A few yearsbefore the Great War, an entrepreneurnamed Homer T. Yaryan(whom a contemporarydescribed as "an energeticoptimist" who "smokedlong, black dgars incessantlyand sworelike a stevedore")developed a newmethod of recoveringnaval stores. The Yaryan methodused steam and solventsto distillrosin, turpentine, and from stumpsrather than oleoresinsfrom livingtrees. After a few failedattempts in the north,Yaryan borrowed heavily to constructa steam- solventplant alongthe MississippiGulf coastin 1909,and built a secondin Georgiathree years later. Yaryanwas redefining the business, transforming it into large-scale,factory operation [25]. About the sametime, a wealthyMilwaukee family namedSchlesinger developeda similarnaval storesprocess, but the outputof their Newport Rosin & TurpentineCo. was consumedinternally (by other Schlesinger companies)to make Kraft paper. Yaryan had problemsof his own. Managementof the companywas spotty. Yaryan's rosin was darker and had a lower melting point than most on the market and his turpentine,quite simply,smelled bad. When thewar disruptedexports, the companyslipped into bankruptcy. In short,to Herculesthe opportunityto enter navalstores in 1919 appearedas follows. The industrywas in the midstof a fundamental restructuring.Government and industry experts were predicting the imminent decimationof thenation's pine . Thus, every pine felled provided woodnaval stores producers who used the new steam- process (Yaryan andNewport) with another source of rawmaterials while depriving gum naval storesproducers of the same. Newportwas not for sale,but the faltering Yaryancompany could be hadfor a goodprice. The choiceseemed clear; as its leadingadvocate, W. R. Jamesof agriculturalsales, put it: "Properly managedand financed" under Hercules, "[Yaryan] could be madeto control the distillationgame in this country"[9]. Althoughthese words were spokenat the first IRD meeting,the Departmentcontinued to gatherinformation and file hundredsof reports aboutthe navalstores industry. By the endof 1919,just as top managersin the companywere pushing for a decision,events took a unexpectedtwist. Herculeslearned that the GliddenPaint & Vanish Companyof Reading, ,had obtained an option on the Yaryan properties. By this time, however,Hercules was so dedicated to the notionof enteringnaval stores that it changedits strategyand decidedit wouldbuild rather than buy a steam- solventdistillation plant. A sitewas chosen at Hattiesburg,Mississippi. Then cameanother unexpected turn. In the summerof 1920Glidden offeredits Yaryan option to Hercules--which took it, operatedthe plants for severalmonths under the option, and secured financial control by thesummer of 1921. In the end, then,with no experiencein the business,Hercules becamethe world's largest naval stores producer by a largeplant and buyingtwo others. This initial investmenttotalled about $4 million,an amountequal to roughlyone quarter of theHercules' total permanent assets. Hercules'headlong plunge into the navalstores industry the summerof 1921 was a bold move-- more daring, in fact, than the simultaneous diversificationefforts of manyof its competitors.This wasbecause naval storeshad little in commonwith explosives:no sharedfacilities, no shared (beyond some skills in mechanicaland ), no sharedcustomers, and no shareddistribution channels.

Crisis and Response

It wouldbe an understatementto say that the newbusiness did not turn out as Herculesexpected. Within months the companyfound itself in the midstof a majorcrisis. The businesswas losing piles of moneyand would continueto do sofor manyyears. There were several problems. First, it was discoveredthat the plants,both new and old, were fiddled with engineering anddesign flaws. Second,the postwardepression hit, hurtingagriculture severely,including naval stores prices. Third, customers continued to spurn the woodnaval stores products because they looked and smelleddifferent from traditionalgum products. Fourth,and worstof all, the imminent dedmationof America'spine forests failed to materialize,as slash pine and secondgrowth yellow pine sprouted up throughoutthe cut-overlands [22]. But Herculesremained committed to its new businessand developeda strategyto attackthese problems on threefronts: engineering,marketing, and research.In the process,Hercules naval stores was transformed into a specialtychemicals business. Mechanicalengineers tinkered with the plantsto increaseefficiency and designednew -pullingapparatus to "replacemen with machines." By the end of the decade,yields of all productswere improved100-200%. On the marketingfront, Herculeshired consultantsand launcheda massivedirect survey in a effortto adopt"the customer's point of view." To sell morerosin, the companyretrained its armyof explosivestechnical salesmen.To sell morepine oil, it developednew applications(disinfecting, deodorizing, flotation)for the little-knownproduct. The greatestgains were in promotingturpentine. Reachingover the headsof paintand manufacturers, Hercules wooed jobbers with better margins,and hardware and paint retailers with jazzy packaging and reams of advertising(featuring two whimsicalcharacters called "Turp and Tine"). At a time whenmost turpentine on the marketwas of dubiousquality, Hercules touted itself as a "great manufacturingconcern" making turpentineof "guaranteed"quality "under chemical control." In the processit transformed a commodityinto a nationallybranded, differentiated product [4]. Finally,through a seriesof researchbreakthroughs during the late-1920s and1930s, Hercules created more and better naval stores products, including an importantprocess (using furfural) for purifyingrosin into lightergrades. This allowedit to supplynew customers-- makers of paper,varnish, and - - who demandedlighter grades of rosin,in effectincreasing the company's potentialmarket share ten-fold to nearlyseventy percent. Exceptfor a coupleof yearsin the late 1920s,Hercules lost moneyin navalstores consistently until the mid-1930s.Thereafter naval stores became a majorcontributor to profits.New products such as hydrogenated rosin and syntheticresins continued to emergefrom the ExperimentStation. More important,Hercules built new businesses on itsgrowing foundation of expertisein the rosin chemistryand naval storesmarketing. In 1931 it purchasedits largestnaval stores customer, the PaperMakers Chemical Co. for $2.5 million, and later expandedits line of . Hercules created a SyntheticsDepartment in 1936 to market its most chemically sophisticatednaval stores products, and continued to addnew synthetics to its rosterof products.Later, new rubberchemicals (such as syntheticrubber emulsifiers)and agriculturalchemicals (such as chlorinatedcamphene, possiblythe most profitable single product in thecompany's history), all based on the chemistryof rosin and rosin derivatives,emerged as major new businesses. In sum,although Hercules' diversification into navalstores was disastrous in the shortrun, in the longerview it achievedits goalof establishinga new foundation,quite apart from explosivesand cellulosics, for continuinggrowth. 69

Conclusion

The interwarhistory of Herculesboth confirmsand contrastswith the generalpattern of growthand change in the chemicalindustry as typifiedby Du Pont. In the caseof celluloseproducts, the paceof changeat Hercules wasslower and more deliberatethan at Du Pont, in part becauseof limited resources,but alsobecause of uncertaintyabout how to establisha viable marketposition. BecauseHercules was a followerin nitrocelluloseproducts, it hadto work hardto find the rightopportunity. Once it did (througha processinnovation), it wascontent to exploitits advantagein a singleproduct line, until the Great Depressionand competitivethreats forced a fundamentalrevaluation of the strategy.By then,fortunately, an internaldebate on the role of researchin the companywas resolved in favorof developingnew products. Even then,however, Hercules did not reallyemulate Du Pont'sstrategy of internaldevelopment supported by internalresearch. Rather, its approach wasto stayabreast of the latesttechnical developments, while concentrating on improwngthe efficiencyof operationsand the qualityand uniformityof products. It generallyintroduced new productsunder licenseagreements, oftenwith foreign chemical companies. Hercules at thesame time worked its way into a tight relationshipwith its customers,especially in the protective coatingsindustry. From thisbase the companysought to expandits product scopeby makingother additives,but it refusedto integrateforward so as to avoidcompeting with customers. The company'sentry strategy in navalstores was bolder and muchless conventionalthan most diversificationmoves in the chemicalindustry after the war. Sensingthat opportunitiesin its existingfields were circumscribed, Herculesmoved into a field in whichit had tittle capabilityor experience, hopingto capitalizemainly on good basicmanagement techniques and personnel. Thus, the naval storesepisode at Herculesalso offers an interesting variationon Chandler'sscale and scopethesis. To be sure,the company foundthat it neededto exploiteconomies of scaleand scope in researchand marketingto surviveand prosperin the business.On the marketingside, Herculesrelied on its networkof explosivessalesmen and built new channels of distributionby advertisingheavily, creating nationally branded products, andso on. And in researchHercules eventually unlocked the secretsof rosin andterpene molecules, spawning new, more refinedproducts (first palerosins and terpenefractions, and later a varietyof paper and rubber chemicals, synthetics,and agricultural chemicals). But althoughthe company'smotivation for thisunrelated diversification includedsome thought of capturingeconomies of scalein production(by usingnew technology that permittedfactory-scale production), little attention wasgiven to the possibilityof capturingeconomies of scopein marketingand research. As one researcherput it, "We were handicappedin havingno backgroundin experimentaldata such as we possessedin the field of explosives"[15]. In bothcellulose products and naval stores, Hercules was constrained by its resourcesin waysthat larger and wealthiercompanies such as Du Pont were not. This circumstancecommonly drove the companyto searchfor niches. It wasmore realistic,Hercules believed, to developrefined, highly- specializedproducts than to seekto dominatelarge markets for processed productsor chemicalcommodities. Even by becomingthe leadingproducer of navalstores, Hercules became a "bigfish in a little pond." Perhapsother casestudies of middle-sizedchemical companies will supportsome of the generalizationssuggested by the Herculesstory. Our readingof the interwarhistory of , for example,seems to indicateso [13]. Thisrelatively small company also followed a nichestrategy in specialtychemicals. Rohm & Haas, like Hercules,had to chooseits opportunitiescarefully rather than hope to diversifyon many fronts or dominatemajor market segments by exploitingeconomies of scaleand scope.

References

1. Alfred D. Chandler, Jr., Scale and Scope: The Dynamics of Industrial Enterprise, 1880s to 1940s (Cambridge, Mass., forthcoming). 2. , Strategy and Structure: Chapters in the Histon/ of the Industrial Enterprise(Cambridge, Mass., 1962). 3. Thomas Gamble, comp., Naval Stores: Histon/, Production,Distribution and Consumption(Savannah, Georgia, 1921). 4. N.S. Greensfelderand J.G. Pollard,Jr., "AMethod of MarketingTurpentine that Begins with the Customer'sPoint of View,"National Industrial Advertisers Association (New York, 1929). 5. LudwigF. Haber, The ChemicalIndustn/, 1900-1930 (Oxford, 1971). 6. WilliamsHaynes, American Chemical Industn/, vols. III-V (New York, lg45-54). 7. , Cellulose: The ChemicalThat Grows(Garden City, NewYork, lg53). 8. HerculesPowder Company, Cellulose Products Department, Annual Report for 1936. 9. , IndustrialResearch Department, Report of February15, 1919. 10. , Operating Department,Annual Reportfor 1923. 11. , Treasurer'sReport for March 1919. 12. CharlesA. Higgins,"The Development of New Products,"in Minutesof the Meetingof the Superintendentsof the HerculesPowder Co. No. 1. (n.p.,privately printed, 1919), 439-44. 13. SheldonHochheiser, Rohm and Haas: Histon/of a ChemicalCompany (Philadelphia, 1986). 14. DavidA. Hounshelland John KenlySmith, Jr., Science and CorporateStrategy: Du Pont R&D, 1902-1980(New York, 1988). 15. IrwinW. Humphrey,"Our Naval Stores Experimental Work," Mixer, 8 (March1926), 53- 54, 76. [The Mixer is Hercules'employee magazine.] 16. JamesA. Lee,"Cellulose Acetate by Hercules,"Chemical & MetallurgicalEngineering, 45 (August 1938). 17. M.G. Milliken, "1936 Greatest Year for Cellulose Derivatives,"The Hercules Chemist, 1 (1937). 18. Naval Stores Review, various issues from 1920s and 1930s. 71

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