Crown Cork & Seal in 1989

Submitted by

Ajal.A.J

2

1891 1950’s

History & background:

• Established in 1891• Growth until the 1950’s• Financial problems in 1956 leading to virtual bankruptcy in 1957• John Conolly arrived in 1957 and turned the company around through modernisation; asset disposal• Started overseas investment• Restructuring• Increased firformance

Timeline – Crown Cork

1956 1957 ……..

3

Threat of substitution

•Suppliers•Can producing companies were fourth largest steel consumers•During 60-70s traditional tin plated can industry was invaded by aluminium cans and also fiber-foils and plastic suppliers

•Customers•80% of metal cans were purchased by major food and beverage companies•Can constituted 45% of the cost of the final product•Hence most had at least two suppliers•Poor services and uncompetitive prices could be punished – Therefore high propensity to substitute•Can plants set up to certain customer format, therefore high bargaining power of customers

Crown Cork & Seal - Acquisitions:

1989 — Purchases Continental Can Canada ($330M), Continental Can US ($336M)

1990 — Purchases Continental RoW ($125M)1992 — Expansion into plastics: Constar purchased ($515 M)

and Van Dorn ($175M)1993 — #2 supplier of metal containers (Pechiney #1)1996 — Acquired CarnaudMetalBox (France) for $5.2B in stock

and cash (largest acquisition of a European firm by an American one at the time) becomes #1 supplier of metal containers

Crown Cork & Seal -International Expansion:

1993 — Builds beverage can and plastic cap production lines in UAE, Jordan, Argentina, and Shanghai

1994 — Expansion into Vietnam via JV with two local companies, plans to produce 400M cans per year

1994 — Announces Beijing JV, its 3rd in China

Crown Cork & Seal-Management:

1989 — William Avery compensation exceeds $2M, putting him in the top quintile of Fortune 500 CEOs

Continuing restructuring: more than two dozen plants closed between 1991 and 1995

1992 — Firm re-organized around 4 divisions: North America, International, Machinery, and Plastics

2000 — William Avery steps down

Key issues•No research and development. Very small innovation

1. No scope for development 2. Decision to stay away from basic research3. Only innovated as per customer needs( 2 piece can)

•Slow growth in metal can segment1. Represents 61% market share.

•Decide whether to diversify1. Can diversify to plastic and glass2. Diversify to totally different fields as some other

companies have done•Decide whether to acquire Continental Can

1. It has revenue $3.36 billion2. Major player in Canada

Key issues contd..

• Connelly himself managed customers. 1. He was considered to be an adept salesman2. He towered over his employees.

• Overcapacity of the plant• Penetration by plastic and glass• Avery , though President of the company since

1981, spent the duration of his career in Connelly’s shadow

@ 1989

• Plastic bottle sales in the United States were estimated to reach $3.5 billion in 1989But ,• The plastic bottle often allowed carbonation

to escape in less than 4 months,while aluminum cans held carbonation for more than 16 months.

SWOT analysis• Strengths

1. Financially sound (debt to equity ratio less than 2%)2. Good customer support3. Cost efficient

• Weaknesses1. No diversity of product2. Limits of cost reduction3. No R & D

• Opportunities1. Globalization2. Chance to consolidate

• Threats1. Slow growth2. Emerging plastic market

MARKET ANALYSISENTRY THREAT (LOW)

•Easy entry•2 piece line available for $12 M•Low profit margins

RIVALRY (HIGH) •Commodity product•Excess capacity•Low market concentration

SUBSTITUTES THREAT (MODERATE)•Low switching cost•Plastic / Glass

SUPPLIER (HIGH)•Few big suppliers•71% of market s aluminium

BUYER POWER (HIGH)•Backward integration•Purchase large volumes•Buyers know cost

PROS AND CONS for Diversifying into Plastic Industry

S.No Pros Cons

1 Increasing market share Material requires for retaining carbonation

2 Light weight & Convenient Handling Preference for flat base containers by soft drink industry

3 Declining Resin prices

4 Easy substitute for glass based containing solution :food ,beverages ,beauty, pharmaceutical

More on Company Position

• Company position is intimately linked with a company’s strategy

• While CC&S’s rivals largely adopted diversification strategies…

• CC&S chose a focused strategy based on appealing to profitable segments of the market

17

Porter’s Five Forces

Competitive R.CustomersSuppliers

Substitutes

New Entrants

StrongModerateWeak

Five Forces Analysis

Substitutes•Aluminium cans, plastic, paper, glass containers•Aluminium/Steel Price/Preformance glass

•Marketing potential of aluminium/glass (lithography)

•"a bottle which a person could recognize even if they felt it in the dark, and so shaped that, even if broken, a person could tell at a glance what it was" – Coca-cola

•Steel alters taste vs aluminium and glass do not•Steel $17.13 vs $20.81 – Steel vs Aluminium

•Substitutes pushed by legislation – recycling & CFC – aerosols

New Entrants•Barriers to entry are quite high•benefits from supply-side and demand-side economies of scale•high capital requirements to compete •incumbency advantages

Customers•High investment levels leads to wanting to protect investment•Under threat from backwards integration •Needed to ensure that they kept their costs low & made it appealing for their customers to outsource rather than move into their territory•They managed this by focusing on their core competencies and reducing costs for their buyers

•Ensuring that they could provide the cans JIT therefore, no capital tied up in can stock.

•Located themselves near several customers for clustering benefits

Suppliers•Under threat of forward integration from the R&D departments of the materials manufacturers•Managed this by building their own R&D departments

Competitive Rivalry•Capital investments are quite high so first movers may falter, Crown followed second mover strategy•Differentiated through innovative technology•No unwise diversification moves•Better sales/income than their competitors•Less overseas competition – market development strategy

5 Forces analysis• Entry threat- LOW

1. High initial investment2. Low profit

• Buyer power – HIGH1. Few big buyers2. Huge costs

• Supplier power – HIGH1. Few big suppliers2. No proper substitute to aluminium

• Rivalry – HIGH1. Low market concentration2. Excess capacity 3. Commodity product

• Substitutes – MEDIUM1. Low switching cost2. Plastic and glass

Five Forces Analysis• Capital investments are quite high so first movers may falter, Crown

followed second mover strategy• Differentiated through innovative technology• No unwise diversification moves• Better sales/income than their competitors• Less overseas competition – market development strategy• Capital investments are quite high so first movers may falter, Crown

followed second mover strategy• Differentiated through innovative technology• No unwise diversification moves• Better sales/income than their competitors• Less overseas competition – market development strategy

1. What are the key strategic issues that Avery needs to consider? What strategic

options are open to him?

After a long run in the metal/aluminium container industry Avery now, needs to consider if it’s the right time to break into the market of the plastic closures and glass containers in order to be able to be competitive in this industry.

Some of the strategic options open to him are whether or not get involved in the bidding for Continental Can.

The acquisition of this company would make Canada Crown the largest presence outside the United States and would double the size of Crown’s domestic operations.

2. If we are going to analyze the industry that Crown competes in, what is the appropriate industry to

analyze?

• In order to analyze the industry that Crown competes in, we have to focus our attention to the metal, plastic and glass container industry.

• The metal container industry should be analyzed because this is how Crown established itself in the container market.

• The plastic and glass industry should also be analyzed because this is the future for Crown.

3. How attractive has the metal container industry been over the years?

• The metal container industry represented 61% of all packaged products in the U.S. and had been very lucrative for the five firms that dominated the $12.2 billion industry during 1989 with Crown Cork and Seal making up 7% of the market.

4. How well did Crown Cork do under John Connelly? What were the keys to their success?

• Crown Cork was revived under John Connelly. At the time that he stepped up as president of Crown Cork the company was at the verge of bankruptcy.

• Once Connelly took the reins of the company the vision changed, to emphasize cost efficiency, quality and customer service.

• This was done by recognizing Crown’s position as a small producer and developed a product line built around the company’s traditional strengths in metal forming and fabrication. Also, Connelly closed inefficient fabrication plants

Options before Avery

After a long run in the metal/aluminium container industry Avery now, needs to consider if it’s the right time to break into the market of the plastic closures and glass containers in order to be able to be competitive in this industry.

Some of the strategic options open to him are whether or not get involved in the bidding for Continental Can.

The acquisition of this company would make Canada Crown the largest presence outside the United States and would double the size of Crown’s domestic operations.

25

Environmental Stability vs. Industry Attractiveness

Environmental Stability Industry Attractiveness

• Declining profit margins• Standardised items• High requirement of capital to enter the market• Highly competitive with a small number of large competitors (Oligopoly)

• Unfavourable Legislative Developments• Environmental Pressure• Social trend towards aluminium• Small number of market participants

xxxxx 26

Financial Strength vs. Competitive Advantage

Financial Strength Competitive Advantage

• Low levels of financial leverage compared to competitors (reduced from 42% to 18%)• Good liquidity due to divestment; used to repay short-term bank debt• ROE highest one in the industry at 15.80%• 65% of revenues were driven from can sales which could be potential weakness

• Second mover strategy• Manufacturing of tin-plated tins and crowns• 4th largest company in the market with a market share of 8.3%• Innovation and exploitation of technology• Research & Development investment

27

Strategies for Crown Cork

•Transitional Aggressive-Competitive

•Build business

•Seeking and protecting position

•Innovative Strategy

•Capitalise on external opportunities

•Reduce exposure to environmental threats

•Aerosols and recycling

Strategy Adopted :Recombining

• 1990 Consolidation BeginsCrown acquires major portions of former industry leader Continental Can Company and becomes the North American packaging leader.

• 1992-Getting into Plastics Crown Cork & Seal acquires CONSTAR International, a world leader in PET plastic containers for the beverage, food and household markets.

29

Questions?

Back up slides

METAL CONTAINER INDUSTRY

61% OF PACKAGED PRODUCTS

3 PIECE CAN TO 2 PIECE CAN

STEEL BODY TO ALUMINIUM

INDUSTRY STRUCTURE

PRICING

CUSTOMERS

DISTRIBUTION

MANUFACTURING

SUPPLIERS

INDUSTRY TRENDS

IN HOUSE MANUFACTURING

PLASTICS

GLASS

SOFT AND ALUMINIUM CANS

DIVERSIFICATION AND CONSOLIDATION

CONNELLY’S STARTEGYPRODUCTS AND MARKETS

MANUFACTURING

RECYCLING

R&D

MARKETING AND CUSTOMER SERVICE

FINANCING

INTERNATIONAL

PERFORMANCE