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MANAGEMENT STRATEGY & POLICY ANALYSIS

Crown Cork & Seal in 1989


Case Analysis
Tamira Conner 3/1/2013

1. Analyze industry Crown competes in.

Crown could be considered to be in the packaging, container, metal container, beverage and aerosol can industries. However Crown competes mainly in the metal container industry. 1) Packaging Industry i. Supplier Power: Steel less expensive, but aluminum is preferred choice and mostly controlled by 3 producers. ii. Buyer Power: Composed of few very large buyers such as Coca-Cola, Anheuser-Busch, Pepsico Inc. These Companies maintains relationships with many suppliers. iii. Barriers to Entry: Startup and Manufacturing costs are high and industry controlled by few industries. iv. Substitutes: There exists the option of switching to plastic or glass which has there advantages. v. Rivalry: Five firms dominate this industry with a total market share of 61% 2) Container Industry i. Competition: High because five firms that dominate this $12.2 billion industry. These five companies are American National, Continental Can, Reynolds Metals, Crown Cork & Seal and Ball Corporation. The competition is high because of little product differentiation in the products, along with over capacity has shrunk the companies margins because of their discount methods to maintain their market share. Competition from customers who have started to employ in-house manufacturing for their needs ii. Suppliers: Medium to High because they both had several advantages to each other. There are tradeoffs to using either aluminum or steel. The advantage of steel over aluminum was price and it represented a savings of $500 million for can manufacturers. And although the switch from aluminum to steel is inexpensive, aluminum was much lighter, of higher quality and was more economical to recycle. Those who produced aluminum had more supplier power since the three largest producers supplied the metal can industry. This gave the companies in the metal can industry less choices from which to pick. iii. Buyers: The largest buyers in this industry were the Coca-Cola Company, Anheuser-Busch Companies, Inc., Pepsico Inc., and Coca-Cola Enterprises Inc., which controlled a significant amount of volume. The fact that the container industry had very little product differentiation made it very easy for the buyer to switch and this is what they did. They maintained relationships with more than one can supplier and if the supplier did not meet their needs then they would cut their orders or move on to another supplier.

iv. Barriers to entry: High since there are only five firms that control 61% of the market. High start-up and manufacturing costs would prohibit someone from entering the market. Two-piece can lines cost $16 million and the investment in the equipment was anywhere from $20-$25 million per line. For a typical three-piece can production line, it cost at least 7 million in basic equipment. 3) Metal Container Industry i. The metal container industry was characterized by low growth, low profits and intense competition. Crown succeeded with a differentiation strategy. Two different groups of customersfood and beverage cannersaccounted for 80 per cent of the metal containers produced. Dominated by 5 firms 61% Market Share. ii. Buyer Power: High in the metal can industry there are many producers of metal cans, however, there are few product options available to the multiple buyers, which increases buyer power. The 10 largest buyers represent approximately 30% of the market, making the large scale buyers highly coveted by the producers. Further, buyers can purchase cans from any producer with low producer switching cost and can have relationships with multiple producers. Finally, buyers have the ability to backwards integrate and produce their own cans, which puts additional pressure on the producers to push costs below the industry entry costs for the buyers. iii. Suppliers: The suppliers in the metal can industry are considered powerful since it is dominated by basically 3 aluminum companies and are a highly concentrated industry in itself. The suppliers also pose a threat of entering into metal can manufacturing, such as Reynolds Metals, which make them a powerful supplier. iv. Barriers to Entry: It is difficult for a small start-up firm to have any real significant impact on obtaining market share unless they come in on a large scale because of the monopoly owned by the five firms. ( Crown, American National Can, Continental Can, Reynolds Metals, and Ball Corporation).Since they all produced mostly two-piece cans and catered to the metal beverage containers market, there appears to be a low product differentiation among the five firms. 2. Who are the main buyers of the can? How do can manufacturers attract the business from the buyers? Soft drink manufacturers are the main buyers of the can The Coca-Cola Company, Anheuser-Busch Companies, PepsiCo Inc, and The Seagram Company. Buyers were geared toward low volume multi-label output which was not suitable for in-house can manufacturing process.

3. Why is the can very important to buyers? What incentives do the buyers of the can want from the can manufacturers? Products are indifferent, so buyers face no switching cost and since the buyers of the can are not the end users there are incentives to control prices more. 4. What are the substitutes of metal containers? What impact does the availability of the substitutes have on the structural attractiveness of the metal container industry? The possible substitutes for the aluminum beverage cans are plastic packaging containers, glass bottles and steel cans. The prices of the aluminum beverage can be controlled by the prices of the possible substitutes. 5. Suppliers of the can manufacturers are the major aluminum and integrated steel companies. Is it possible for can manufacturers to successfully trade one off against the other in a price negotiation? Why? or Why not? Producers of metal cans are limited by the supply of raw materials for their cans and the location of the suppliers of the raw materials. Switching costs can be high if the producer has to go to another supplier across the country. In addition, there are only 5 main producers of metal cans, thus the suppliers have only limited options. Overall, supplier power is medium. 6. Is it a problem that Reynolds is both a supplier and competitor? Reynolds, for example, utilizes themselves as an aluminum supplier, making the need for companies like Crown to work more closely with suppliers to properly compete with the partially, vertically integrated Reynolds. 7. What were the barriers to entry in 1989? What was the major reason for lack of entry? Barriers to entry 1) It is difficult for a small start-up firm to have any real significant impact on obtaining market share unless they come in on a large scale because of the monopoly owned by the five firms. ( Crown, American National Can, Continental Can, Reynolds Metals, and Ball Corporation). This is due to the fact that start-up and manufacturing costs are very high. Can production lines can cost anywhere between $16-25 million making it very difficult for the average Joe to start a company from ground up. 2) Since they all produced mostly two-piece cans and catered to the metal beverage containers market, there appears to be a low product differentiation among the five firms. 3) The suppliers in the metal can industry are considered powerful since it is dominated by basically 3 aluminum companies and are a highly concentrated industry in itself. 4) The suppliers also pose a threat of entering into metal can manufacturing, such as Reynolds Metals, which make them a powerful supplier.

8. Is there some way to differentiate yourself in the can manufacturing industry? Explain. Technical service and rapid delivery Almost every companys selling price is identical. Only differentiation strategies make Crowns products more attractive than others. Generally, the only way to differentiate a company in a commodity industry is by price. Crown differentiated itself by 1) Maintaining excess capacity so that it could meet surges in customer demand, thereby alleviating customers inventory needs. i. High quality, flexibility, and quick response to customer needs are the some evidences that Crown provided differentiation. Crown has the ability to provide technical assistance and specific problem solving at the customers plant. Crowns research team also worked closely with customers on specific customer requests. Crown has also implemented just-in-time delivery techniques effectively. 2) Provided technical help to customers production problems, thereby becoming a problem solver as well as a can provider. Because it was dealing in such "hard-tohold" products as carbonated beverages and aerosols, the problems of packaging these products were considerable. 3) By providing flexibility in delivery as well as technical advice to clients in the growth segment of the can consuming market, Crown Cork and Seal was able to charge a premium price and avoid the price competition game. 4) The company also followed a "fast second" R&D strategy, in which it would quickly adopt new technological innovations, after allowing other firms to make the initial investment. This made for lower R&D expenditures and, therefore, lower overhead 5) While Crown Cork and Seals competitors were using the cash generated by their business to expand into unrelated diversification, Crown Cork and Seal repurchased stock, resulting in steadily increasing earnings-per-share figures.

9. What are the main elements of Connellys strategy? Why was the strategy the key contributor for the companys superior performance? Crown has a focused strategy on core competencies which include: 1) Continuous control of costs 2) Improvement in quality 3) Maintenance of customer service and customer support. 4) He focused on specialized uses in international markets. Uses included i. Beverage cans and aerosol cans, eventually anticipating and capitalizing off the soft drink business. 5) In distribution, Connelly expanded national distribution in the U.S through manufacturing reorganization, which provided products for numerous customers located near their plants. 6) Connelly also focused on heavy investment abroad in developing nations. i. Invested heavily in new and geographically spread out facilities. The plants were small and located near the customer instead of the raw materials. ii. There was 24-hour operation, quality, flexibility, customer service and accountability, which resulted in greater quality control and lower costs. 7) Crown Cork and Seal, which manufactures steel and aluminum cans, engaged only in a limited amount of applied research and was positioned as a "fast second" in implementing new developments. Crown Cork and Seals management has felt that, as one of the smaller firms in the industry (in 1978 it was number four in sales and held 8.3 percent market share), it could leave the technological innovation to others. However, they did concentrate still on providing the best customer service by helping to fulfill specific requests of customers through R & D. 8) As far as marketing and customer service is concerned, Connelly always put the customer and its needs first. Crown responded quickly and provided problem solving and technical assistance directly to the customer. Connelly believed in maintaining close ties with the customer to improve quality. 9) Through financing, Connelly reduced debt and stopped dividends to allow for company growth. In turn, the company did grow, reducing debt form 42% to less than 2% and increasing EPS from $3.00 to $10.11 10) Focus on profitable market segments i. By exiting from market segments where decreasing metal can usage was the trend, as in motor oil, and concentrating primarily in the areas where growth was expected (soft drinks and beer). 11) Decentralized responsibility which productivity among plant managers.

10. What changes are taking place in the can manufacturing industry? Any change to the industry would be deemed threat in the can manufacturing industry. 1) New Packaging materials a. Aluminum was lighter, had better quality, "superior lithography qualities" and less costly to recycle. b. Aluminum became substitute to steel cans. 2) Industry moving toward usage of glass and plastic bottles a. Plastics were also the growth leader in the 1980s. They went from 9% market share of the container market in 1980 to 18% in 1989. 3) Increase in, in-house manufacturing a. Production of cans at "captive" plants-those producing cans for their own company use-accounted for approximately 25% of the total can output in 1989. Many brewers found it advantageous to invest in captive manufacturer because high-volume, single-label production runs made them more profitable. This trend is taking away a lot of business from the can manufacturer industry, weakening future growth potential. 4) Consolidation 5) Diversification 6) Price reductions 7) Operating margin decreasing 11. Should Avery acquire Continental Canada? Why? Why Not? In order to increase market share making it a market leader and take advantage of the economies of scale acquiring Continental Can would deem beneficial to Crown despite the difficulty most firms face in acquisition. Crown is efficient in creating low-cost manufacturing plants and the acquisition would not be difficult since both already produce metal containers.

12. Is diversifying into plastic packaging an attractive opportunity? Why? Why not? Yes. It is attractive because metal cans are not expected to grow. Plastic closures, glass containers, and plastic containers have growth expectations. Crown could expand into the glass and plastic container industry.

13. Is acquisition of the US operations of Continental Can a good decision for Crown? Why? Why not? Due to high volume and low margin business Crown needs to acquire Continental Can would expand the market share of Crown. By acquiring Continental Can, Crowns market share would increase from 7% to 25% making it on par with American National Can. 14. Is selling the business an option? Why? Why not? No. While competition is high Crown has found a way to differentiate itself which coupled with the acquisition of Continental will make them a leader in the industry.