Alternative in the Face of Change

In mid-1966, the management of MRC was considering alternative courses of action with
regard to the ARI division. The profits of this division were unsatisfactory in relation to the amount
of capital required to support its operations. The market for ARI's major product line faced even
greater near-term difficulty than in the past (owing to the Chevrolet decision); thus, MRC had to (1)
continue realizing progressively less-satisfactory returns on the assets employed by ARI or (2)
commit a substantial amount of new capital to production facilities for new fibers or (3) abandon
certain areas of the rayon business.

Leaving the Market: Abandoning the rayon business entirely or in part presented a problem, since
the physical plant of ARI was on the books of the company at a net book value of about $20 million. If
this was sold substantially below book value, MRC would have to absorb a substantial nonrecurring
loss on the sale, which would probably reduce the company's 1966 earnings per share below the level
achieved in 1965. This loss would be nonrecurring; nonetheless, MRC management felt that investors
might confuse it with a downturn in earnings from normal operations. The company was in the
middle of its fifth consecutive year of earnings progress in 1966. Its stock price had moved up steadily
since 1961 in response to these earnings gains, and management was reluctant to risk this share-price
progress through investor misunderstanding.

Investing in New Fibers: Selling the ARI division was not a particularly attractive alternative;
however, investing in facilities to produce newer fibers also raised some difficult problems. First,
since nylon seemed to have already neared a peak in tire-cord use, an investment in a facility to
produce this fiber would be practically obsolete by the time it was completed. On the other hand,
polyester had not reached the level of acceptance in tire production which would justify the
construction of a large new plant just to serve this segment of the polyester market. New fiber plants
had to be large to be economically competitive (Exhibit 4). Economies of scale are clearly evident
here, as they are in most chemical production processes. 1 Similar production economies could be
expected in polyester-fiber production. For this reason, if MRC went into the production of polyester
tire cord, it would be necessary to produce polyester fiber for other uses as well. This would put the
company into the textile-fiber business against firms such as Du Pont. Except for the venture into
high-wet modulus rayon staple fiber in 1964, the company had had little contact with textile mills and
had competed directly with large apparel fiber manufacturers such as Du Pont only to a limited
extent.
The Polyester Proposal

In mid-1966, the top management of MRC was considering a specific proposal that would
carry the corporation into large-scale production of polyester fiber for tire cord and apparel
fabrics. This proposal had been initiated by the ARI division general manager, John Wentworth,
an experienced and highly-regarded young executive who had been lured away from Monsanto
Company after MRC's experience with high-wet modulus rayon staple fiber.

From 1966 through 1971, the project would require an investment of $25.2 million.
About
$20.2 million of this amount would be used to construct a new plant for the production of
polyester fiber; $5 million would be added to working capital to support the increased level of
sales.

By 1969, the new facility would have given ARI the capacity to produce up to 50-million
pounds a year of polyester fiber and resin. Ten-million pounds would go into tire cord, 30-million
pounds would be marketed as staple fiber in competition with firms such as Du Pont, and 10-
million pounds of resin chips would be sold to other polyester fabricators (Exhibit 5).