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Crown Cork and Seal Company: Summary of Case and Key Questions

Company Background Information and Historical Context


By 1977 The Crown Cork and Seal Company was the fourth largest producer of metal
cans and crowns. Under the leadership of John Connelly, the company had transformed
from near-bankruptcy in 1957 to becoming a formidable force in the domestic and
international metal container market. By 1976 Crown had revenues of $910 million, $343
million of which came from international markets – making them the largest international
producer. They derived 65% of total sales from tin-plated cans and 29% from crowns; the
remainder of their business came from bottling and canning machinery. In terms of
product categories, cans were categorized as follows: Food cans, beverage cans, pet foods
and general packaged cans. The biggest growth category was beverage cans which
comprised of soft drinks and beer. At the time of the case, Crown was considered to be
extremely successful – their return on sales was twice that of their three largest
competitors, and they enjoyed the highest profit growth over the last 10 years.
Industry Characteristics and Value Chain
Customers: 80% output came from food and beverage companies who maintained at
least two suppliers and had significant power of them.
Competition: Crown’s current market share was 8.3%. Their three biggest
competitors were American Can (16.6%), Continental Can (18.4%) and National Can:
(8.7%). There also faced significant threats from customers backward-integrating into
the supply chain (e.g. Campbell soup started making their own cans) and from
aluminum producers like Alcoa grabbing market share.
Suppliers: Big U.S steel companies and new entrants who supplied aluminum, fiber-
foil and plastics.
Crown’s Strategy
Philosophy: Relentless focus on core strengths: product lines were based on metal
forming and fabrication competencies with a single-minded focus on tin cans and
crowns. Since R&D was not their strength, they decided to be the “second” player,
learning from other firm’s mistakes and successes.
Culture: Customer-centric culture. Plants were spread out to be close to customers –
this reduced transportation costs and allowed the company to react to customer needs
quickly. Furthermore, each plant served multiple customers.
Scope: Lots of emphasis was placed on international expansion, to tap into markets
where packaged foods were being rapidly adopted.
Operations: Plant sizes were small allowing them to be nimble and flexible.
Key Industry Trends
The threat of self-manufacturing from customers.
Threat of new packaging materials – in particular aluminum started to become a
competitive alternative to steel cans for a variety of reasons (reduced transportation
costs due to lighter weight, safety, environmental impact, etc.). Also, competition
began emerging from fiber foil and plastics.
Packaging Revolution -- With companies differentiating on packing, two problems
emerged: 1 aluminum and plastics became better contenders for variability in packaging
design
Customers started investing large amounts of R&D dollars in packaging making it
harder for the smaller suppliers to compete.
Future Issues
Ozone scare that aerosols cause permanent damage to the ozone layer.
Regulation around non-returnable cans –resulting in increased popularity of
aluminum (aluminum had a larger network + higher recycle value).
Strategic Questions:
How would you characterize this industry? How attractive or unattractive is this
industry?
What do you think are the active ingredients that contributed to Crown’s success?
What do you think are the biggest threats to Crown going forward? Do you think
Crown should invest in aluminum?
Do you think Crown can continue to grow by pursuing the same strategy?
If you don’t think so, what should Crown do to win in this industry?
Report 2

The changes taking place in the metal container industry at the time of the Crown, Cork
and Seal case using Porter's 5 forces can be described as follows:

Current Players
There was a high concentration of market share held by five companies in the metal can
industry. Collectively, the five companies held 61% of the market, with the remaining
39% shared by approximately 100 firms. With the five firms holding a large market
share, the competitive environment becomes more like a monopoly and therefore less
competitive. The rivalry among the five firms seems to have intensified due to the
following observed industry characteristics:
1. The little growth potential for metal cans in the 1990s and the analysts'
expectations of plastics as the "growth segment for containers."
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 asset specificity of the industry creates a high exit barrier where the
equipment is highly specialized that the firms may have a difficult time selling to buyers
from other industries.
4. Major customers producing their cans in-house that accounted for approximately
25% of the total can output in 1989.

Barriers to entry
One of the barriers to entry in the metal can industry at this time is the monopoly held by
the top five firms. It would 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 or if they have
proprietary know-how. Another barrier would be asset specificity as mentioned in
number 3 above.
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.
Although steel is another raw material used, its usage had declined over the years as
aluminum was lighter, were of better quality, less effect on product taste, has "superior
lithography qualities" and less costly to recycle. Also, the suppliers do not have to
compete with other products for sale to the metal can industry. The aluminum and steel
companies serve as a check and balance for each other. The suppliers also pose a threat
of entering into metal can manufacturing, such as Reynolds Metals, which make them a
powerful supplier.

Buyers
The buyers in the metal can industry could be considered to be powerful as they are
concentrated on the beverage and food/general packaging industries and the metal cans
purchased are basically a standard or undifferentiated product. Because 45% of the total
cost of a packaged beverage is the can itself, the beverage companies maintain
relationships with more than one supplier in the metal can industry.

Substitutes
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.
Report 3

Executive Overview
In April of 1957, when Crown Cork & Seal was on the edge of bankruptcy, John
Connelly took over presidency with intent to save the company. By the end of 1957,
Crown had "climbed out of the coffin and was sprinting." Connelly's unique leadership is
what contributed to the success of Crown. In May of 1989, Connelly stepped down from
his position as chairman appointing his long-time disciple William Avery as chief
executive officer. Avery had plans to assess Connelly's long-followed strategy because
of the industry changes that were taking place. Since Connelly got into the business in
1957, the metal can industry had been greatly redefined as both suppliers and customers
of can makers moved into can-making themselves. With the changes that were taking
place, Avery wondered if it would be a good idea for Crown to bid on all or part of
Continental Can (one of their competitors), whose operations were up for sale. Avery
was also faced with the decision to break Crown's tradition and increase its product line
beyond the manufacture of metal cans and closures. Little growth potential was seen in
the metal can industry, and plastics were forecasted as the growth segment for containers.
Crown's competitors had been expanding aggressively in a variety of directions, and
Connelly remained careful and thrived. Because Crown had done the same thing for so
long, Avery wondered if it was time for them to change. If Crown acquired Continental
Can Canada, Canada would become Crown's largest single presence outside of the U.S.
and would double the size of Crown's domestic operations. However, most mergers in
this industry had not worked out well, and Avery had concerns about taking two
companies from completely different cultures and bringing them together.

Analysis
The use of Porter's 5 Forces Model gives an analysis of the industry for Crown
Cork & Seal and an overview of where it is positioned within it. There is a strong
competitive force among the top competitors within the metal container industry. This is
because the industry makes up 61 percent of all packaged products in the United States
and is also only dominated by five firms; which is very minimal compared to an industry
as restaurants. The 4 rivaling competitors of Crown, making up the rest of the industry,
include: American National Can, Continental Can, Reynolds Metals, and Ball
Corporation.
The threat of new entrants into the metal can industry is quite weak though. 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. This threat however, is quite opposite from the threat of
substitute products. This threat is very strong for this industry, which results mainly from
the existence of plastic and glass containers. The growth of plastic containers is the
industry's major worry; mainly because it is more lightweight and convenient than metal
cans or glass by consumers.
Analyzing the competitive force of suppliers and buyers are the last of Porter's
analysis. The force of suppliers in the metal can industry is normal to strong. This is
because, although it is very inexpensive for companies to switch suppliers from
aluminum to steel, the consumer actually prefers the aluminum can. It is more
lightweight and economical to recycle. A strong force of suppliers is also a result of the
metal can industry only being supplied by 3 aluminum producers.
The force of buyers is normal to strong as well because the soft drink and beer
companies are very large and purchase a sizable amount from the metal can industry. It
is also indicated by the fact that those beverage companies purchase their packaging from
a few large firms in the industry. It would be a definite strong force if they purchased
from a large number of firms.
By looking at Porter's 5 Forces Model, it is noted that Crown Cork & Seal lies
within the five dominant firms of the industry. This indicates that the company does have
the opportunity to compete and even become the leader of the industry. To be the leader;
however, will depend on Crown's strategy.

Problem Statement
One problem that Crown Cork and Seal faces is that the industry is becoming
more competitive through acquisitions and mergers. These acquisitions and mergers in
the 1980s served to shift, as well as consolidate power, at the top of the county's leading
manufacturers. Some of these acquisitions and mergers include such companies as
American National Can and Continental Can, which are two major competitors for
Crown Cork and Seal. Peter Kiewit Sons Inc. purchased Continental Group in 1984, and
turned sales of 3.3 million in 1988.
Another problem serving Crown Cork and Seal is that the industry has become
less dependent on can sales alone. They have diversified across the spectrum of rigid
containers to supply all major end-use markets (food, beverages, and general packaging),
others diversified into non-packaging businesses such as energy (oil and gas), and
financial services. The product line of the worlds largest can maker, American National
Can, is steel cans, glass containers, and caps and closures served the major beverage,
food, pharmaceuticals, and cosmetics market. This goes to show that even the world's
largest can maker doesn't solely rely on the sales of its cans.
Another reason why Crown Cork and Seal should not to depend on can sales
alone is the rise of in-house manufacturing and plastics. 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. 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.

Recommendations
Crown Cork & Seal, under the supervision of Bill Avery, should step outside the
traditional strategic boundaries and draft a new blue print for the future. Over the last
few years, many of the companies in competition with Crown have either merged with
another company or began pursuing other ventures outside the can industry. All are still
holding strong as reputable companies. If Crown continues to just stay put where they
are and continue making what they are producing now, the growth of the company will
continue to diminish.
We recommend that Crown merge with Continental Can to build a company with
unlimited possibilities. With the work ethic already instilled in the employees of Crown
and with the direction that Bill Avery has receive from innovator John Connelly, success
from the merger could be very likely. By merging with Continental, Crown would
expand their market share in numerous other countries. Although it may take a lot of
time and energy, we believe that a merger would prove profitable in the end.

Options
Since the business of cork sealing and aluminum production is so diverse and expansive,
there are several options of ways to take control of the market. The first option would be
to merge. Merging with a major distributor and making the Crown Cork and Seal
Company a subdivision of say a company like Coca Cola, would have a great impact on
the sales and conditions of selling products to consumers. Combining two great assets to
the consumer market would make distribution easier; make flow of products in and out of
factories flow faster and smoother than being shipped between check points of the
production process. Another option would be to switch to plastics. This is a much
diversified market as well. Plastics account for around one half of the distribution for
almost all of the major distributors listed in our text. Switching to plastics might be an
alternative solution at the moment, but plastics may not always be as lucrative market as
everyone believes it is. Another option is to simply just stay put. Don't diversify into any
other type of business, or merge with another company and continue day to day sales and
services as normal. The last option that we came up with is to combine merging and
switch to plastics. This would work on both ends of the spectrum of alternatives. At one
point we are going to merge with other companies and continue to make the same
products, but at the same time we are going to switch to plastics so that we can diversify
into the market more. If predictions end up being right, that corks for wine and other
bottles will soon not exist and everything will be going to twist offs or pressure sealed,
then it might be a wise decision to switch to plastics and merge with a large corporation.
Implementation and Control
In order to create a strategic plan of implementing our plan to merge, Crown Cork and
Seal should swap and interlace managers from both companies in order to create balance
between manager levels at each company. The Board of Directors will be consolidated
with cross-over training and implementation. Training sessions will be held for all of the
employees. A SWOT analysis will be conducted for each location, resulting in the shut
down of unprofitable plants and the consolidation of more human and financial capital.
This process will be done by selling off the equipment and machinery of the weaker
plants. However the original strategy of Crown Cork and Seal will remain in action.
The expected results of implementing this merge will have short-term and long-
term effects on Crown. The short-term effects will be the loss of money from the
acquisition of Continental Can Company. The long-term effects beyond a five year
scope, the company will aim to become the leader of the metal can industry.