Crown-Cork-Seal

10/8/2011

Crown, Cork & Seal in 1989 Industry analysis and corporate strategy

What are the key issues facing CC&S at the time of the case? What are the strategic options CC&S has open to it?

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Key issues/strategic options • Crown’s key strategic options include the following: • Acquisition of some or all of Continental Can assets; • Entering the plastics business, either by building internal capability or acquiring it; • Expanding the metal container line to reduce focus on beverage and aerosol; • Diversify into other packaging materials or product categories; • Diversify into other less related businesses; • Exit or sell the business.

A question about the external environment… Just who/what should be considered in the industry? Who should we include in the Competitive / Task Environment?

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A question about the external environment Just who/what should be considered in the Competitive / Task Environment? • Crown could be considered to be in the packaging, container, metal container, beverage and aerosol can industries – glass, plastics, paper, cardboard, composite manufacturers along with all the players in the case could be possible competitors. • Best to start with the main segment Crown serves, the metal container industry.

Industry by sales

Ball Corporation Crown Cork & Seal Heekin Can, Inc. Van Dorn Company

• But what about Reynolds Metals (7% market share)?

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Tell me about the buyers…

Buyers • Many of the buyers are large, powerful companies – Coke, Pepsi, Campbells, Kraft, General Foods

• Cans are bought in large volumes – almost a commodity • Buyers demand & receive JIT re supply • Buyers punish poor quality by cutting order size • Some buyers show credible threat of b wards integration into container making, knowledge diffusion (both technical and commercial) • Can = abt 45% of cost of soda, all savings in can costs go straight to profit – Buyer industries tend to be competitive

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Tell me about substitutes…

Substitutes • Many substitutes for metal containers – Glass, plastic, paper, fiberfoil, paper and plastic combinations

• Action of substitutes strategic options is to limit demand for metal containers – Growth of substitutes from 9% to 18% through the 80s

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Tell me about suppliers…

Suppliers • The major aluminum (71% of sales to the industry) and integrated steel (29% of sales to the industry) companies – Aluminum is classic oligopoly (nearing duopoly) dominated by Alcan & Alcoa – Some limitations on this oligopoly’s power – slowing growth, substitutes, exit barriers for marginal players – Reynolds may benefit from R&D synergies

• Pricing is used by steel to defend their market share but it’s clear this is a declining market for steel (are they harvesting cash?)

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What about the ease of new entry?

New Entry • More than 100 mostly regional firms entered the industry – Transportation costs limit geographical territories to ~300 miles – Capital costs for 3 piece can product lines are relatively low ($7 million 1989 dollars) – Capital costs for a 2 piece can line ~$25 million

• Major reason for recent lack of entry isn’t capital costs or technology – it’s because of the trend in industry margins.

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So, when it comes to rivalry… • This is basically a low growth, moderately capital intensive, somewhat cyclical, commodity product industry. – Capital costs relative to variable costs mean you have to get high volume / market share which puts pressure on prices.

• Bottom line: This is not an attractive industry (as evidenced by the diversification of some of the major players).

Competitive Forces Analysis Margins have fallen significantly as raw materials costs have risen. Competitors find it hard to differentiate themselves since customers buy primarily based on price. Rivalry is high.

Suppliers’ Power

Substitutes Threat High

Rivalry High

High

Buyers’ Power High

High – suppliers are aluminum, integrated steel companies, classic oligopolies that may be vertically integrated, becoming both suppliers and competitors

Medium barriers to entry, with capital costs small relative to the size of the market, so an efficient low cost plant that can weather low margins could capture market share

High – there are many substitutes for metal containers, limiting prices & long term demand since alternative packaging innovations like paper juice boxes can easily emerge

High large breweries, soft drink bottlers, food companies all buy in large volumes, setting price, demanding quality & delivery. Have very minor switching costs, can be backward integrated into manufacturing their own cans.

New Entrants Barriers Med

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Competitors’ Net Profit Margins 6.00

Return on Sales (%)

5.00 4.00 3.00 2.00 1.00 Watch out for the reversed X axis here! 1988

1987

1986

1985

1984

1983

Ball Corporation

Crown Cork & Seal

Heekin Can, Inc.

Van Dorn Company

1982

Based on the external environmental factor analysis, the metal container business is not an attractive industry (and many competitors have diversified away from it into general packaging).

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Net Sales (millions of US $)

CC&S Net Sales 2000 1800 1600 1400 1200 1000 800 600 400 200 0 1981 1982 1983 1984 1985 1986 1987 1988 United States

Europe

All others

So, outline Connelly’s strategic leadership…

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Strategic Leadership As CEO Connelly had vision, developed strategy, created a culture to reinforce this strategy – he led by example through hard work and frugality, setting demanding goals, continually stretching the organization – made sure policies were consistent with an overall low cost, focused strategy: • Crown had outstanding financial performance by focusing on the beverage & aerosol high growth segments; • Committed to customer service, just in time delivery; expanded product to include canning machine design, build, service • Both manufacturing and R&D concentrated on cost reduction, also developed competency in manufacturing filling equipment solutions, expanded internationally; • Decentralized responsibility at the plant level to empower plant managers, and Connelly paid himself a low salary.

So, how well has Connelly done? 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 1981 1982 1983 1984 1985 1986 1987 1988 Return on Average Equity (%): Return on sales Return on average assets

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Corporate Strategy Revisited • New CEO Avery recognized declining metal container business, growth of plastics, consolidation in the beverage manufacturers, innovation in can making technology requiring additional capital investment, overcapacity causing consolidation in the industry. Avery responded by 1995, stock prices & net income were way up: • He had acquired Continental Can in both Canada & U.S. and Continental ROW, acquired Constar (plastic container manufacturer), Van Dorn (drawn aluminum food containers), set up joint ventures with can manufacturers in Vietnam & China and others, expanded existing international plants; • Closed or reorganized slower or unproductive plants, ultimately restructured into four divisions – Plastics, North American, International, and Machinery.

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