Case study

Crown Cork & Seal in 1989

Overview of the company
Crown Holdings Incorporated, formerly Crown Cork & Seal Company, is
an American company that makes metal beverage and food cans, metal aerosol containers, metal
closures and specialty packing. Founded in 1891, it is headquartered in Philadelphia,
Pennsylvania and has 149 plants around the world.

Company history analysis
1891 : Crown Cork & Seal Company
1920 : Patent ran out, economical functioned 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 cages
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 rescue plan was simply -- just common sense--
1960s: company averaged an annual 15.5% increase in sales and 14% in profits

Background of the case study
John F. Connelly, Crown Cork & Seals ailing octogenarian chairman, stepped down and
appointed his long-time disciple, William J. Avery, chief executive officer of the
Philadelphia can manufacturer in May 1989
As Crowns new CEO, Avery planned to review Connellys long-followed strategy in
light of the changing industry outlook
Case analysis questions
Reflecting on these dramatic changes, Avery wondered whether Crown, with $1.8 billion
in sales, should consider bidding for all or part of Continental Can
Avery also wondered whether Crown should break with tradition and expand its product
line beyond the manufacture of metal cans and closures
For 30 years Crown had stuck to its core business, metal can making, but analysts saw
little growth potential for metal cans in the 1990s
Industry observers forecast plastics as the growth segment for containers
As Avery mulled over his options, he asked: Was it finally time for a change?

Customers of Crown Cork & Seal
Among the industrys largest users were the Coca-Cola Company, Anheuser-Busch
Companies, Inc., Pepsico Inc., and Coca-Cola Enterprises Inc
Consolidation within the soft drink segment of the bottling industry reduced the number
of bottlers from approximately 8,000 in 1980 to about 800 in 1989 and placed a
significant amount of beverage volume in the hands of a few large companies


Suppliers of Crown Cork & Seal
The countrys three largest aluminum producers supplied the metal can industry
Alcoa, the worlds largest aluminum producer with 1988 sales of $9.8 billion, and Alcan,
the worlds largest marketer of primary aluminum, with 1988 sales of $8.5 billion,
supplied over 65% of the domestic can sheet requirements
Reynolds Metals, the second-largest aluminum producer in the United States, with 1988
sales of $5.6 billion, supplied aluminum sheet to the industry and also produced about 11
billion cans itself
Reynolds Metals was the only aluminum company in the United States that produced
cans Steels consistent advantage over aluminum was price. According to The American
Iron and Steel Institute in 1988, steel represented a savings of from $5 to $7 for every
thousand cans produced, or an estimated savings of $500 million a year for can
manufacturers

Core competency of Crown Cork & Seal
Core competency is a unique ability that a company acquires from its founders. Core
competencies are what give a company one or more competitive advantages, in creating and
delivering value to its customers. The core competency of crown cork and seal is cost advantage
and best quality, it competes on cost and quality parameter as compare to its competitors.

Competitor analysis
The metal container industry had changed considerably since Connelly took over
Crowns reins in 1957
American National had just been acquired by Frances state-owned Pechiney
International, making it the worlds largest beverage can producer
Continental Can, another long-standing rival, was owned by Peter Kiewit Sons, a
privately held construction firm
Reynolds Metals, a traditional supplier of aluminum to can makers, was also a
formidable competitor in cans
The moves by both suppliers and customers of can makers to integrate into can
manufacturing themselves had profoundly redefined the metal can industry since John
Connellys arrival

Metal Industry analysis
The metal container industry, representing 61% of all packaged products in the United
States in 1989, produced metal cans, crowns (bottle caps), and closures (screw caps,
bottle lids) to hold or seal an almost endless variety of consumer and industrial goods
Glass and plastic containers split the balance of the container market with shares of 21%
and 18%, respectively
Metal cans served the beverage, food, and general packaging industries
Metal cans were made of aluminum, steel, or a combination of both. Three-piece cans
were formed initially
Two-piece cans, developed in the 1960s
By 1983, two-piece cans dominated the beverage industry where they were the can of
choice for beer and soft drink makers. Of the 120 billion cans produced in 1989, 80%
were two-piece cans

Growth and demand analysis of cans
Throughout the decade of the 1980s, the number of metal cans shipped grew by an annual
average of 3.7%
Aluminum can growth averaged 8% annually, while steel can shipments fell by an
average of 3.1% per year
The number of aluminum cans produced increased by almost 200% during the period
19801989, reaching a high of 85 billion, while steel can production dropped by 22% to
35 billion for the same period

Market share /Industry Structure
Five firms dominated the $12.2 billion U.S. metal can industry in 1989, with an aggregate
61% market share
The countrys largest manufacturerAmerican National Canheld a 25% market share
The four firms trailing American National in sales were Continental Can (18% market
share), Reynolds Metals (7%), Crown Cork & Seal (7%), and Ball Corporation (4%)
Approximately 100 firms served the balance of the market

Pricing good value strategy
Pricing in the can industry was very competitive. To lower costs, managers sought long
runs of standard items, which increased capacity utilization and reduced the need for
costly changeovers
As a result, most companies offered volume discounts to encourage large orders

Profit margin analysis
Despite persistent metal can demand, industry operating margins fell approximately 7%
to roughly 4% between 1986 and 1989
Industry analysts attributed the drop in operating margins to (1) a 15% increase in
aluminum can sheet prices at a time when most can makers had guaranteed volume prices
that did not incorporate substantial cost increases; (2) a 7% increase in beverage can
production capacity between 1987 and 1989; (3) an increasing number of the nations
major brewers producing containers in house; and (4) the consolidation of soft drink
bottlers throughout the decade. Forced to economize following costly battles for market
share, soft drink bottlers used their leverage to obtain packaging price discounts
Over capacity and a shrinking customer base contributed to an unprecedented squeeze on
manufacturers margins

Crown Cork & Seals strategy analysis
Distribution strategy
Due to the bulky nature of cans, manufacturers located their plants close to customers to
minimize transportation costs
The primary cost components of the metal can include (1) raw materials at 65%; (2)
direct labor at 12%; and (3) transportation at roughly 7.5%
Various estimates placed the radius of economical distribution for a plant at between 150
and 300 miles
Beverage can producers preferred aluminum to steel because of aluminums lighter
weight and lower shipping costs
In 1988, steel cans weighed more than twice as much as aluminum
The costs incurred in transporting cans to overseas markets made international trade
uneconomical
Foreign markets were served by joint ventures, foreign subsidiaries, affiliates of U.S. can
manufacturers, and local overseas firms
Manufacturing strategy
Two-piece can lines cost approximately $16 million, and the investment in peripheral
equipment raised the per-line cost to $20$25 million
The minimum efficient plant size was one line and installations ranged from one to five
lines
While two-piece can lines achieved quick and persistent popularity, they did not
completely replace their antecedentsthe three-piece can lines
The food and general packaging segmentrepresenting 28% of the metal container
industry in 1989continued using three-piece cans throughout the 1980s
The beverage segment, however, had made a complete switch from three-piece to two-
piece cans by 1983
The beverage industrys switch from three- to two-piece lines prompted many
manufacturers to sell complete, fully operational three-piece lines as is for $175,000 to
$200,000

Industry changing trends /dynamics
The major trends characterizing the metal container industry during the 1980s included
(1) the continuing threat of in-house manufacture
(2) the emergence of plastics as a viable packaging material
(3) steady competition from glass as a substitute for aluminum in the beer market
(4) the emergence of the soft drink industry as the largest end-user of packaging, with
aluminum as the primary beneficiary
(5) the diversification of, and consolidation among, packaging producers

Aluminum and steel battle
Since the invention of the aluminum can in 1958, steel had fought a losing battle against
aluminum
In 1970, steel accounted for 88% of metal cans, but by 1989 had dropped to 29%. In
addition to being lighter, of higher, more consistent quality, and more economical to
recycle, aluminum was also friendlier to the taste and offered superior lithography
qualities
By 1989,aluminum accounted for 99% of the beer and 94% of the soft drink metal
container businesses, respectively















Product flow chain

Product flow




Suppliers Manufacturers Customers
There are
very few
suppliers

These
suppliers are
large,
powerful

Probably
dictate
prices to the
manufacturi
ng firms




Supplier
Few firms
Growth is slow
It is a very large
market
Tough price
competition
Fixed costs are
relatively high
Little product
differentiation
Little value added
High transportation
costs
Close substitutes
exist
Two-piece cans have
brought change to
the industry
Manufac
turer
Large and
powerful
customer
base

Customers
SWOT analysis










Strengths
Brand name
Global recognition
Corporate social
responsibility
Quality standards
Customer loyalty
Latest technology





Weaknesses
High operational cost
Lack of product
diversification
Limited customers






Opportunities
Chance of consilidation
Increase profitability of
the firm
Improve operational
efficiency
Product diversification








Threats
Intense competiiton
Preference over other
substitutes
Increasing price of raw
material
Slow growth rate
Emerging plastic market



Porters 5 forces model




















BUYER POWER-
high
Limited
Customers
Threat to
backward
integrate

INTENSITY OF
RIVALRY-high
International
Expansion
5 big competitors
SUBSTITUTES-high
Substitutes in
market available
Plastics, glass
Diversification
SUPPLIER
POWER-high
Steel vs.
Aluminum
Few suppliers
Threat to forward
integrate
Competitor rivalry and
Crown Cork
THREAT OF ENTRY-
medium
High initial
investment
Less profit margins
PEST analysis








PEST analysis


Political
Government policy
for new businesses
set up-encourage
businesses to
operate

Strategic alliance
policy

Interational
expansion policy-
permitted



Economic
Export incentives

Impact of inflation

High Investment

Taxation policy




Social
Consumer
preferences

Increase in soft
drink consumption
will increase
bottles/cans
demand

Impact of
globalization









Technological
Advancement of
technology

Technology
reduced the
manufacturing cost

Increase in
competition
because of
technology







Crown Cork & Seals value chain




















Sale Forecasting +
Manufacturing
1.closing down the
Philadelphia facility

2. new and
emphasized quality,
flexibility, quick
response to customer
flexibility
and quick
response to
1.reduced (payroll
by 24%) 1,647
jobs.

2. Change
focused on
enhancing the
existing product
line
Crown Cork & Seals strategy analysis-business, corporate, functional
Corporate strategy

Business strategy

Functional strategy

Combination
Strategy
Growth
Stability
Retrenchment
Cost-
Leadership
Recycle
(Green technology)
R&D
supply chain
Connellys Strategy analysis
According to William Avery, From his first day on the job, Mr. Connelly structured the
company to be successful
He took control of costs and did a wonderful job taking us in the direction of becoming
owner-operators
Connelly, emphasized cost efficiency, quality, and customer service as the essential
ingredients for Crowns strategy in the decades ahead

Products developed and markets served
Recognizing Crowns position as a small producer in an industry dominated by American
Can and Continental Can, Connelly sought to develop a product line built around
Crowns traditional strengths in metal forming and fabrication. He chose to emphasize
the areas Crown knew besttin-plated cans and crownsand to concentrate on
specialized uses and international markets
In 1960, Crown held over 50% of the market for motor oil cans. In 1962, R. C. Can and
Anaconda Aluminum jointly developed fiber-foil cans for motor oil, which were
approximately 20% lighter and 15% cheaper than the metal cans
Connelly lead Crowns conversion from steel to aluminum cans in the early 1980s
Connellys strategy was based on two geographic thrusts: expand to national distribution
in the United States and invest heavily abroad
Metal containers generated 65% of Crowns $1.8 billion 1988 sales, while closures
generated 30% and packaging equipment 5%.
Manufacturing strategy
When Connelly took over in 1957, Crown had perhaps the most outmoded and inefficient
production facilities in the industry
Dividends had taken precedence over new investment, and old machinery combined with
the cumbersome Philadelphia plant had generated very high production and
transportation costs
Soon after he gained control, Connelly took drastic action, closing down the Philadelphia
facility and investing heavily in new and geographically dispersed plants. From 1958 to
1963, the company spent almost $82 million on relocation and new facilities. From 1976
through 1989, Crown had 26 domestic plant locations versus 9 in 1955
The plants were small (usually 2 to 3 lines for two-piece cans) and were located close to
the customer rather than the raw material source
Crown operated its plants 24 hours a day with unique 12-hour shifts
Crown emphasized quality, flexibility, and quick response to customer needs
To accommodate customer demands, some of Crowns plants kept more than a months
inventory on hand. Crown also instituted a total quality improvement process to refine its
manufacturing processes and gain greater control
According to a Crown spokesperson, The objective of this quality improvement process
is to make the best possible can at the lowest possible cost

Recycling
In 1970, Crown formed Nationwide Recyclers, Inc., as a wholly owned subsidiary
By 1989, Crown believed Nationwide was one of the top four or five aluminum can
recyclers in the Country
Crown had invested in the neighborhood of $10 million in its recycling arm


Research and Development (R&D)
Crowns technology strategy focused on enhancing the existing product line
Crown was able to beat its competitors into two-piece can production

Marketing and customer service
In conjunction with its R&D strategy, the companys sales force maintained close ties
with customers and emphasized Crowns ability to provide technical assistance and
specific problem solving at the customers plant
Crowns manufacturing emphasis on flexibility and quick response to customers needs
supported its marketing emphasis on putting the customer first. Michael J. McKenna,
president of Crowns North American Division, insisted, We have always been and
always will be extremely customer driven.

Financing tactics
After he took over in 1957, Connelly applied the first receipts from the sale of inventory
to get out from under Crowns short-term bank obligations
He then steadily reduced the debt/equity ratio from 42% in 1956 to 18.2% in 1976 and
5% in 1986. By the end of 1988, Crowns debt represented less than 2% of total capital.
Connelly discontinued cash dividends in 1956, and in 1970 repurchased the last of the
preferred stock, eliminating preferred dividends as a cash drain
From 1970 forward, management applied excess cash to the repurchase of stock
Crown Cork & Seals revenues reached $1 billion in 1977 and earnings per share
reached $3.46. Earnings per share reached $10.11 in 1988 adjusted for a 3-for-1 stock
split in September 1988

International expansion strategy
A significant dimension of Connellys strategy focused on international growth,
particularly in developing countries. 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. These rights gave Crown first chance at any new can or
closure business introduced into these developing countries
By 1988, Crowns 62 foreign plants generated 44% of sales and 54% of operating profits.
John Connelly visited each of Crowns overseas plants
Crown emphasized national management wherever possible. Local people, Crown
asserted, understood the local marketplace: the suppliers, the customers, and the unique
conditions that drove supply and demand
Crowns overseas investment also offered opportunities to recycle equipment that was,
by U.S. standards, less sophisticated
As can manufacturing was new to many regions of the world, Crowns older equipment
met the needs of what was still a developing industry overseas

Financial performance analysis
Connellys strategy met with substantial success throughout his tenure at Crown
With stock splits and price appreciation, $100 invested in Crown stock in 1957 would be
worth approximately $30,000 in 1989. After restructuring the company in his first three
years, revenues grew at 12.2% per year while income grew at 14.0% over the next two
decades
Return on equity averaged 15.8% for much of the 1970s, while Continental Can and
American Can lagged far behind at 10.3% and 7.1%, respectively
Over the period 1968-1978 Crowns total return to shareholders ranked 114 out of the
Fortune 500, well ahead of IBM (183) and Xerox (374)
In the early 1980s, flat industry sales, combined with an increasingly strong dollar
overseas, unrelenting penetration by plastics, and overcapacity in can manufacturing at
home, led to declining sales revenues at Crown
Crowns sales dropped from $1.46 billion in 1980 to $1.37 billion by 1984
However, by 1985 Crown had rebounded and annual sales growth averaged 7.6% from
1984 through 1988 while profit growth averaged 12%
Over the period 1978-1988 Crowns total return to shareholders was 18.6% per year,
ranking 146 out of the Fortune 500
In 1988, Business Week noted that Connellyearning a total of only $663,000 in the
three years ending in 1987 garnered shareholders the best returns for the least executive
pay in the United States

John Connellys Contribution to Success
Customers, employees, competitors, and Wall Street analysts, attributed Crowns
sustained success to the unique leadership of John Connelly
He arrived at Crown as it headed into bankruptcy in 1957, achieved a 1,646% increase in
profits on a relatively insignificant sales increase by 1961, and proceeded to outperform
the industrys giants throughout the next three decades
Despite the employees loyalty, Connelly was a difficult man to please
Crowns employees had to get used to Connellys tough, straight-line management.
Averys Challenge in 1989
Avery considered the growing opportunities in plastic closures and containers, as well as
glass containers. With growth slowing in metal containers, plastics was the only container
segment that held much promise.
While Crowns competitors had aggressively expanded in a variety of directions,
Connelly had been cautious, and had prospered.
Within the traditional metal can business, Avery had to decide whether or not to get
involved in the bidding for Continental Can.
He also thought about the challenge of taking two companies that come from completely
different cultures and bringing them together. Avery found himself challenging Crowns
traditional strategies and thought seriously of drafting a new blueprint for the future

Proposed strategy for case Crown Cork & Seal
Beer and soft drinks represent growth areas in the metal container industry.
Although beer and soft drinks face threats from aluminum, these market segments face
only minimal threats from other materials such as fiber foil, plastic, or glass.
Acquisition of continental can company will increase the market share, profitability,
stock price and many more.

Entrance into the plastic container industry
Pros
Market gap in the container industry
Decreasing shipping cost because of lightweight
Developed in various pattern
Made of natural resources (Petroleum)

Cons
Not completed loop of recycle
Not core competency
Allowed carbonation to escape in less than 4 months


Acquire the Continental can company
Pros
Getting more market share
Expansion of operations
Increment in sales
Addition in workforce
Increase stock price
Increasing bargaining power against from supplier and customer
Expansion in world wide
Cons
Acquiring conflict in culture
Strong competition
Increasing trend of in-house can manufacturing

What are the risks of diversification?
Three major risks
First
There is no guarantee that a firm will enjoy success in new business.
Second
Diversification brings with it the risk of neglecting the core business.
Third
This neglect can be especially harmful if there is technological change in the industry.

Recommendations
On the above mentioned two proposed strategy and options, company should acquire the
continental can manufacturing company. This will help to increase the market share. It will
provide the opportunity to increase the domestic operations, sales, workforce and stock price.
Moreover, it will increase the bargaining power against from supplier and customer and will
assists in worldwide expansion.