Crown Cork & Seal in 1989

MGMG555 Competitive Strategy and Industry Structure

Instructor: Sarayuth Saengchan, Ph.D.

College of Management, Mahidol University

Trimester: 3/2013 Date: 01/02/2014

Member

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 Agenda

 Crown Cork & Seal in 1989 Background

 Problem Statement
 Recommendation
 Analysis
 SWOT Analysis
 Five forces
 Value chain
 Strategy
 Corporate Strategy
 Business Strategy
 Functional Strategy
Crown Cork & Seal in 1989
Background
 Industry Structure

Crown Cork & market share

Seal Ball Corporation
Renolds Metals 5% 5%
5%

Centinental Can
13% American
National
44%

Other
28%

Five firms dominated the $12.2 billion U.S. metal can industry in 1989, with an aggregate 61% market share
 Price

Pricing is very competitive.

To lower costs, managers sought long runs of standard items and
offer volume discounts.
Can industry operating margins fell from
7% to 4% between 1986-1989 because of
7%
7% increase in beverage can production
capacity between 1987-1989
15% increase in aluminum can
sheet price after guaranteed
volume prices
Increase number of the major brewers
producing containers in house

The consolidation of soft drink

bottlers throughout the decade

4%
 Customers

Top U.S. Users of Containers, 1989

Coca-Cola Company

Anheuser-Busch Companies Inc.

PepsiCo Inc.

The Seagram Company, Ltd.

 Distribution

Manufacturers located their plants close to customers to minimize transportation costs

The primary cost components of the metal can include

Labor
12%
RM 65 %

Transporta
tion 7.5%

Foreign markets were served by

joint ventures, foreign Beverage can producers preferred
subsidiaries, affiliates of U.S. aluminum to steel because of lighter
firms and local overseas firms. Cost weight and lower shipping costs
 Manufacturing

Beverage segment used two-piece cans

: The two-piece can line with the peripheral equipment
cost about $20-25 million per line

Food and general packaging segment used three-piece cans:

The three-piece can line with the equipment cost about
$8.5-9 million per line

Most plants had 12 to 15 lines for the increased flexibility of handling more
than one type of can at once
 Suppliers

In 1970, steel accounted for 88% of metal cans, but dropped to 29% in 1989

Being lighter, more consistent quality and more economical to recycle, by 1989
aluminum accounted for 99% of the beer and 94% of the soft drink metal can

The country’s three largest aluminum producers were

Compara ve Sale Performance of Major Aluminum
Suppliers, 1988 (dollars in millions)
Alcan Aluminum ALCOA Reynolds Metalsa

9,795.30
8,529.00
7,767.00 5,467.00
6,797.00 5,718.00
5,567.10 5,956.00 5,750.80
4,667.20 5,162.70
4,283.80 3,728.30
3,638.90 3,415.60

1988 1987 1986 1985 1984

 The metal container industry trend

In-house
manufacture

Plastics

Glass

Soft drinks &

aluminum cans

Diversification
& consolidation
 In-house
manufacture

• Producing cans for their own company use—accounted for

approximately 25% of the total can output in 1989.

• Much of the expansion in in-house manufactured cans, occurred at

plants owned by the nation’s major food producers and brewers.

• Brewers found it advantageous to invest in captive manufacture because

of high-volume, single-label production runs.

• Soft drink bottlers were also geared to low-volume, multilabel

output, which was not as economically suitable for the in-house can
manufacturing process.
 Plastics

 Plastics was the growth leader

in the container industry.

1980 1989
• Share 9% • Share 18%

Plastics could retain carbonation and

prevent infiltration of oxygen less than 4
months while aluminum cans held
carbonation for more than 16 months

U.S. brewers expected beer containers to

have at least a 90-day shelf-life.
 Glass
Glass

 Glass bottles accounted  Soft drink bottlers

for only 14% of domestic preferred the metal can
soft drink sales to glass because of a
variety of logistical and
economic benefits:
 faster filling speeds
 lighter weight
 compactness for inventory
 transportation efficiency
 Soft drinks &
aluminum cans

 The soft drink industry of metal

cans shipped accounted for
 29% in 1980
 42% in 1989

 Aluminum’s penetration could be

traced to several factors:
(1) weight advantage over glass and steel
(2) ease of handling
(3) a wider variety of graphics options
provided by multipack can containers
(4) consumer preference

 Aluminum’s growth was also

supported by the vending
machine market
 Diversification
& consolidation

Low profit margins, excess capacity, and rising material

and labor costs prompted a number of corporate diversifications and
subsequent consolidations throughout the 1970s and 1980s.

For example, American Can reduced its dependence on domestic

can manufacturing, moving into totally unrelated fields, such as
insurance.
Major Competitors
 Company History

1891 : Crown Cork & Seal Company

1920 : Patent ran out, competitive became serve and nearly
bankrupted the company
1927 : Crown was brought by Charles McManus
1930 : Crown prospered, selling more than half of the United States
and world supply of the bottle cap --- McManus anticipated the
success of the beer can and diversified into can making
1946 : McManus died, the company ran on momentum
Try to expand into plastic and ludicrous diversification into metal
bird
1955 : Partnership with Connelly Container, Inc.
1956 : Connelly began buying stock and was asked to be an outside
director
1957 : Crown teetered on the Verge of bankruptcy John Connelly took
over the president.
His recue plan was simply -- just common sense--
 John Connelly’s action

To pare down To institute the Focused on the

the organization. concept of company’s debt.
accountability.
 Reduce HQ staff  Paid off the bank
by half to reach  Establishing Crown Introduced sale
a lean force of 80. managers as forecasting dovetailed
 Abandoning its “owner operators” with new product
paternalistic culture and inventory control.
to simply functional Plants managers
organization. take responsibility “Climbed out of the

 Reduce payroll for plant profitability coffin and was sprinting”

by 24% and and including
eliminated 1,647 jobs. allocated costs.
 Connelly’s Strategy

 Research and Development (R&D)

Crown’s technology strategy focused on enhancing the existing product line. We
do have tremendous skills in die forming and metal fabrication.
 Marketing and customer service
Crown’s manufacturing emphasis on flexibility and quick response to customer’s
needs supported its marketing emphasis on putting the customer first.
 Financing
Connelly then steadily reduced the debt/equity ratio from 42% in 1956 to 18.2% in
1976 and 5% in 1986.
 International
Between 1955 and 1960, Crown received what were called “pioneer rights” from
many foreign governments aiming to build up the industrial sectors of their countries.
 Performance
Connelly’s strategy met with substantial success throughout his tenure at Crown.
 Avery’s Challenge

 Growing opportunities in plastic closures and

glass containers.

 Acquisition of Continental Can Canada

(CCC)
Problem statement
 Problem Statement

Entrance into the Acquire the

plastic container Continental can
industry company
Recommendation
 Recommendation

Entrance into the plastic container industry

Pros
•Market gap in the container
industry
• Decreasing shipping cost
because of lightweight
• Developed in various pattern
Cons
• Portion of metal can more than
plastic container
• Not completed loop of recycle
• Not core competency
•Allowed carbonation to escape in

•Made of natural resources less than 4 months

(Petroleum)
 Recommendation

Acquire the Continental can company

Pros Cons
•Getting more market share
• Acquiring conflict in culture
•Getting plastic container line
• Strong competition
manufacturing from Continental
can • Increasing trend of in-house
•Increasing bargaining power can manufacturing
against from supplier and
customer
•Expansion in world wide
Analysis & Strategy
 SWOT Analysis

Strength Weekness
• Cost efficiency • Lack of product diversity
• Product differentiate • Short of R&D
• Customer relationship
• Environmental care
Growth Strategy:
Expansion Globally
Opportunities Threats
• Slow growth rate
• Chance to consolidation • Substitutable
• Globalization /Pioneer • Emerging plastic market
rights • Challenge from
buyers/providers
 Five Forces Analysis

(Low)
Threat of New
Entrants

(High) (High) (High)

Bargaining Bargaining
Rivalry among
Power of Power of
Existing Firms
Suppliers Buyers

(High)
Threat of
Substitute
Products
 Five Forces Analysis

Rivalry among Existing Firms (High)

- 5-6 big competitors
- Also be supplier => Reynolds Metals
- New production technology => Reynolds Metals
- New product design => Ball Corporation

Bargaining Power of Buyers (High)

- Top 5 soft drinks (Coca- Cola Company , Anheuser-Busch
Companies Inc., Pepsi co Inc., and Coca-Cola Enterprises
Inc.)
 Five Forces Analysis

Bargaining Power of Suppliers (High)

- Big 3 aluminum packaging producer => Alcoa, Alcan and
Reynolds Metals
- Only one aluminum can producer => Reynolds Metals

Threat of Substitute Products and Services (High)

- Plastic and glass
- Plastic => 18% growth in 1989 (from 9% in
1980), lightweight and more convenient

Threat of New Entrants (Low)

- Vertical and horizontal integration
 Crown Cork’s Value Chain

focused on
enhancing the
1.reduced (payroll by existing product line
24%) 1,647 jobs.

2. Change Divisional
Line to “Owner
Operators”

Sale Forecasting +
Manufacturing

1.closing down the

Philadelphia facility
2. new and
geographically
dispersed plants
emphasized quality, flexibility
flexibility, quick and quick response
response to customer needs to customer’s needs
 Corporate Strategy

Combination Strategy

Growth Expanding more market share.

Stability Product and market are rarely change.

Retrenchment Changes in consumer behavior.

 Business Strategy

Cost-Leadership Diversification

Recycle New material packaging

(Green technology) (Plastic and glass)

R&D

Supply chain
 Business Strategy

Product & Services Marketing Management

Concentric
diversification New Market Innovation
strategy

R&D Production

Recycle (Green Supply chain

technology)
 Functional Strategy

Marketing &
Manufacturing R&D Product Service

Quality, Flexibility, and Innovation on customer Focus on metal forming

international markets
Quick requests & Fabrication

Good Relationship with

Customer