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?

10/8/2011

Key issues/strategic options

Crowns 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?

10/8/2011

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)?

10/8/2011

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

10/8/2011

Tell me about substitutes

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

Action of substitutes is to limit strategic options demand for metal containers

Growth of substitutes from 9% to 18% through the 80s

10/8/2011

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 oligopolys 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 its clear this is a declining market for steel (are they harvesting cash?)

10/8/2011

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 isnt capital costs or technology its because of the trend in industry margins.

10/8/2011

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.

Substitutes Threat
High

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

Suppliers Power
High

Rivalry
High

Buyers Power
High

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

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.

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

New Entrants Barriers

Med

10/8/2011

Competitors Net Profit Margins

6.00 5.00

Return on Sales (%)

4.00 3.00 2.00 1.00 Watch out for the reversed X axis here! 1988 1987 1986 1985 1984 1983 1982

Ball Corporation Heekin Can, Inc.

Crown Cork & Seal Van Dorn Company

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).

10/8/2011

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

Net Sales (millions of US $)

So, outline Connellys strategic leadership

10

10/8/2011

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

11

10/8/2011

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.

12