Crown Cork & Seal in 1989

Crown Cork & Seal in 1989

Teaching Note

I introduce the class by remarking that John Connelly ran Crown Cork & Seal for over 30 years and followed essentially the same strategy for the entire period.  The total return to shareholders over the 32-year period was just under 20% compounded.  Now that Connelly has stepped down as CEO and given control to William Avery, is it finally time for a change?  I begin by asking what are the key strategic issues facing Avery in the summer of 1989.  

Question 1.        What are the key strategic issues that Avery needs to consider?  What strategic options are open to him?

Here I just want to develop the list and save the analysis of the issues until the end of class.  The list of issues should include some of the following:  (1) The old Continental Can is apparently for sale either in whole or in part.  Should Avery consider bidding on some or all of the business?  (2) Metal containers are very slow-growth and plastics is forecast to make significant inroads.  Should Avery consider entering plastics?  If so, in what segments, and should they build their capability or acquire someone?  Who?  (3) Expand the product line to a full line of metal containers, not so focused on beverage and aerosol?  (4) Diversify into other packaging materials and product categories?  (5) Diversify into other less-related businesses?  (6) Exit, or sell the business?  

How should we go about addressing these issues?  Presumably we should analyze the appropriateness of Crown’s future competitive strategy.  We must first understand the industry in which Crown competes and then identify and evaluate the strategy that Connelly followed to see if it is indeed time for a change.  Finally, we will return to the question of what should Avery do?  

Question 2.        If we are going to analyze the industry that Crown competes in, what is the appropriate industry to analyze?  (Do not write anything on the board.)

The responses should range from the "packaging industry” to the “container industry” to the “metal container industry” and, perhaps, to the “beverage and aerosol can industry.”  Start with the packaging industry and ask:  “Why packaging?  Who is in the packaging industry?”  The response should be all of the players in the case.  “Who else?  All glass manufacturers, all plastics manufacturers, all paper and cardboard manufacturers, all composite manufacturers, etc.?”  Eventually we end up with almost all manufacturing in North America.  In a real sense, the packaging industry is too broad and includes many different industries to be included in our discussion. Not because various packaging manufactures are unimportant and can be ignored, but because we will treat them somewhat arbitrarily as substitutes in our analysis.  

Then ask:  “Why not focus our analysis on the beverage and aerosol segments of the market?”  These are Crown’s “served market” and reflect their strategic positioning.  Many companies, in fact, tend to focus on analyzing their served markets.  However, this is clearly too narrow a view of the industry since it completely misses potential threats, as well as opportunities, that the company faces.  It is useful to point out that after we carry out our industry analysis we may need to go back and segment the industry and refine our analysis by segment to develop appropriate tactics for the segments they serve.  So we agree to analyze the metal container industry.  

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

Here we carry out a straightforward five forces structural analysis of the industry.  Although you can start anywhere, analyzing buyers is probably the best place to begin.  

Buyers xxx Are these the types of buyers that you want to sell to?  No, why not?

Many of the buyers are large powerful companies:  large breweries (Anheuser Busch, Miller Beer, etc.), soft drink bottlers (Coke, Pepsico, etc.), and food companies (Campbell Soup, Kraft General Foods, etc.).  These companies buy in large volumes that affect your economics through long, continuous runs with few production line changeovers.  In order to attract this business, can manufacturers aggressively pursue this business but give away much to its value in their zeal?  Why?  Cans are commodity products.  There is no way to differentiate what you do, with the possible exception of superior service.  However, buyers demand and receive just-in-time inventory and punish suppliers with cuts in the size of orders for either poor service or out of line prices.  Quality appears to be a strategic necessity and not a possible source of competitive advantage. Most buyers use two or three suppliers, and, with essentially zero cost, can adjust their orders and, with very minor cost, switch to an alternative supplier.  Some manufacturers have built plants dedicated to a single buyer and found themselves in a vulnerable position.  

In addition, buyers are very knowledgeable and many are backward integrated into cans to supply some of their own needs.  They know the cost to manufacture cans and represent a credible threat of increasing their level of backward integration.  This is very important for large brewers and food companies who have long runs of identical cans, but less true of soft drink producers who have smaller plants and more product variety.  Smaller buyers in the industry are apparently also quite knowledgeable on current prices, being kept informed by information leaks from larger buyers.  

The can is very important to buyers since it represents up to 45% of the cost of, say, a canned soft drink.  Any savings achieved when purchasing of cans drops right to the bottom line.  Given the cost of cans and the fact that buyers tend to be in rather competitive industries, their incentives are price, price, price, and delivery.  

Substitutes xxx What are the substitutes for metal containers?  Do they make the industry more or less attractive?  Less,  why?

There are many substitutes for metal containers:  glass, plastic, paper, fiberfoil, paper and plastic combinations, etc.  What impact does the availability of substitutes have on the structural attractiveness of the industry?  First, substitutes limit prices.  In the short term, price increases can be met with a shift to glass or plastic by brewers or soft-drink bottlers.  Hence, immediate retaliation is possible.  What other structural impacts do substitutes have?  Second, they may limit long-term demand for metal containers.  In the longer term, alternative packaging innovations may emerge that assimilate entire segments of the industry.  Fiberfoil for oil cans was followed by plastic bottles with long spouts and resealable screw tops.  At the time these plastic oil bottles were launched by Quakerstate in the United States, Bethlehem Steel had a large stake in the steel tops and bottoms of fiberfoil cans.  They considered introducing their own steel spout for a fiberfoil can, but by then the market segment had moved to plastic bottles.  Plastic soft drink bottles, plastic orange juice cans, and paper and plastic juice boxes, are all examples of segments that moved away from metal containers for reasons of ease and convenience.  Hence, substitutes limit and possibly reduce long-term structural demand.