Crown Cork & Seal in 1989

Strategic issues and options open to Avery In order to develop a future strategic decision plan we have assessed Crown’s business with a SWOT analysis, keeping in mind all issues Avery has to consider. That implies an evaluation of the different strengths, weaknesses, opportunities and threats of Crown Cork’s business.

The analysis is as follows: • Strengths: Crown’s return on equity and total return to shareholders was ranked much higher than its competitors’, creating high value to its customers; Crown has a tremendous skills in die forming and metal fabrication, and they can move to adapt to the customer’s needs faster than anyone else in the industry; Crown’s research teams also worked closely with customers on specific customer requests. Weaknesses: Growth slowing in metal containers; the possibility of diversifying beyond the manufacture of containers was not at hand, because while Crown’s competitors had aggressively expanded in a variety of directions, Crown had been cautious. • Opportunities: expand its product line beyond the manufacture of metal cans and closures, since industry observers forecast plastics as the growth segment for containers in the 90s; Avery also considered the growing opportunity in glass containers; the bidding for all or part of Continental Can would almost double its size and make them even more international. Threats: Avery knew that most mergers in this industry had not worked out well; the challenge of taking two companies that come from completely different cultures and bringing them together; Potential bidders for all, or part of Continental’s operations, included many of Crown’s U. S. rivals in addition to European competition; the continuing threat of in-house manufacture of metal cans. Regarding to the strategic options which are open to Avery, we have thought about three options as the most profitable and likely ones.

The first one would be to expand its product line beyond the manufacture of metal cans and closures, aiming its business to the plastic container segment which held much promise. The second option would be to merge with Continental Can. It would provide them such size in metal can industry that they would be the highest can metal manufacturing company in the globe. The last option would be to remain on the metal can industry without merging with Continental Can. This option would be the less profitable one, but on the other hand it would be the less risky one.

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They would be able to try to improve even more its manufacturing process and taking advantage of its competitors’ diversification. The growth in metal can segment is supposed to be stuck, but maybe they would rise its market share reaching higher revenues to Crown’s shareholders. Metal container industry After the John Connelly’s reorganization and strategic changes, Crown competes in the metal containers industry, more specifically in the beverage cans market and the aerosol market.

To compete in this market, since the seventies, Crown has developed a conversion from steel to aluminum cans and manufacturing them with the two-pieces model. The metal container industry has changed considerably over the last years. Since 1981 to 1989 the market has grown from 88,810 to 120,795 million of cans. This means that this industry has experienced a grown of 36% over the past 8 years period, representing 61% of all packaged products in the United States in 1989.

For a better understanding of the metal container industry, we are going to present the Porter's five forces analysis: - Threat of new competition. We considered this force low due to the industry’s high barriers to entry. Some of these barriers are: a) High initial capital investment: Each two- piece can line plus its peripheral equipment needed cost approximately $20-$25 million. b) Strong rivalry among competitors: five established and experienced firms dominated the industry with an aggregate 61% market share. ) Low operating margins due to aggressive discounts of competitors. Thread of substitute products: a) Plastics: plastic’s market share has grown from 9% in 1980 to 18% in 1989. Plastic’s light weight and convenient handling contributed to widespread consumer acceptance. b) Glass: In the beer category consumers had certain preference with glass bottle that would work to its advantage in the coming years. Bargaining power of buyers: There were large buyers such as Coca-Cola Company, Anheuser-Busch Companies, Inc. , PepsiCo Inc. , and Coca-Cola Enterprises Inc.

These buyers usually maintained relationships with more than one can supplier and they could punish poor service and uncompetitive prices by cuts in order sizes. In addition, many large brewers moved to hold can costs down by developing their own manufacturing capability. Bargaining power of suppliers: The country’s three largest aluminum suppliers were Alcoa, Alcan and Reynolds Metals. Aluminum prices increased by 15% while steel prices increased by 5% to 7%. - - - 1 - Intensity of competitive rivalry: In 1989, five firms dominated the metal can industry, with an aggregate 61% market share.

American National Can held 25% market share, followed by Continental Can (18%), Reynolds Metals (7%), Crown Cork & Seal (7%), and Ball Corporation (4%). Pricing was very competitive among them. Most companies offered volume discounts to encourage large orders. John Connelly’s thrust to success Connelly’s arrival to the presidency of Crown brought about important changes in the way the company operated, the actions he took were actually beneficial for the company, taking it from bankruptcy to a situation of annual profits with annual revenues growth about 12%.

To achieve the success, the company did not apply complex strategies, nor invested in neither revolutionary products nor innovative diversification; in his own words the plan was to apply “just common sense”. The company moved from a paternalistic leadership to a functional organization, Connelly also eliminated the divisional line and staff concept, he were able to reduce with this actions Crown’s payroll by 24% in less than two years. Another key to success was that they were focused on enhancing the existing product line.

Connelly was not interested in researching new materials or packaging, because of that he closed the Central Research Facility, and worked closely with large breweries in the development of two-pieces cans. Even though it was not a company based on innovation, Crown worked closely with their customers to provide them technical assistance and to satisfy their requests. To successfully carry out its policy of controlling costs and improving quality, Crown also needed to focus its growth policies in developing countries, taking advantage of new business opportunities to expand its market share.

Connelly emphasized national management wherever possible to develop the internationalization process. New challenges in the industry The most significant changes that are taking place in the industry are the more often using of plastic containers and glass bottles, and the diversification and subsequent consolidations due to low profit margins, excess capacity and rising material and labor costs within the metal can industry. Some competitors have invested in stuff such as insurance, energy exploration, glass containers or high-technology market.

In our opinion, Bill Avery should respond with a thorough market analysis, assessing each of Crown’s options to keep its market share and then choosing the most profitable in terms of revenues and duration. Only once they have done this analysis, they are able to make the correct decision, which can be to remain in the metal can industry, the diversification to other segments of the market, or to merge with Continental Can. That implies the need to think deeply in each option before make the decision of either change Connelly strategy or remain in the same market segment with the same strategy. 2

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