Intro to Case Crown Cork and Seal has emerged out of bankruptcy because of John Connellys great leadership

skills. In 1989 he stepped down and Bill Avery took his position. When Avery took charge, he was faced with a metal container industry that had been through many changes. The companies not only had to compete with each other, but also with their suppliers and customers who have managed to enter into this industry on their own by participating in in-house manufacturing. At the time Avery was appointed, he was facing many challenges within the industry and many hard choices to make. Many predicted that a plastic was the growth segment for containers and this left Avery with a decision of whether he should expand the product line or just keep the core traditions of the company and remain the same. Through this analysis we will see what some strategic issues Avery needs to consider, the industrys attractiveness using Porters five forces, we will see how Cork did under Connelly and what has changed since Connellys time. Porters Five Forces Metal Container Industry {draw:frame} {draw:frame} {draw:frame} {draw:frame} {draw:frame} Supplier Power Steel less expensive, but aluminum is preferred choice and mostly controlled by 3 producers. Buyer Power Composed of few very large buyers such as Coca-Cola, Anheuser-Busch, Pepsico Inc. These Companies maintains relationships with many suppliers. Barriers to Entry Startup and Manufacturing costs are high and industry controlled by few industries. Substitutes There exists the option of switching to plastic or glass which has there advantages. Rivalry Five firms dominate this industry with a total market share of 61% By using Porters Fiver Forces, we can see how the industry operates and what type of environment it is in. Rivalry in this industry is high, as there are only five firms that dominate this $12.2 billion U.S steel metal can industry in 1989 with a market share of 61% between them. These five companies are American National, Continental Can, Reynolds Metals, Crown Cork & Seal and Ball Corporation. The competition has been intense since there is very little product differentiation in the products, along with over capacity has shrunk the companies margins because of their discount methods to maintain their market share. They are not just facing competition between themselves but also from their customers who are turning to in-house manufacturing for their needs and the emergence of plastic and glass producers. Supplier power is medium to high because they both had several advantages to each other. There are tradeoffs to using either aluminum or steel. The advantage of steel over aluminum was price and it represented a savings of $500 million for can manufacturers. And although the switch from aluminum to steel is inexpensive, aluminum was much lighter, of higher quality and was more economical to recycle. Those who produced aluminum had more supplier power since the three largest producers supplied the metal can industry. This gave the companies in the metal can industry less choices from which to pick. The buyer power is affected by who their customers are and the volume in which they purchase. The largest buyers in this industry were the Coca-Cola Company, Anheuser-Busch Companies, Inc., Pepsico Inc., and Coca-Cola Enterprises Inc. These few large companies controlled a significant amount of volume. The fact that the container industry had very little product differentiation made it very easy for the buyer to switch and this is what they did. They maintained relationships with more than one can supplier and if the supplier did not meet their needs then they would cut their orders or move on to another supplier. The other problem here is that some customers like the brewers began to produce their cans in-house. Those who did this accounted for 25% of the total can output in 1989. The Barriers to entry are high since there are only five firms that control 61% of the market. Another factor was the high start-up and manufacturing

costs. Two-piece can lines cost $16 million and the investment in the equipment was anywhere from $20-$25 million per line. For a typical three-piece can production line, it cost at least 7 million in basic equipment. This was money not just anyone had, which made the barriers to entry high. Porter Five Forces shows us why the metal can industry may not be very attractive. The first reason was that pricing was very competitive. To keep prices low, they wanted to standardize their items. In the long run along with other factors, this lead to over capacity and a shrinking customer base which caused their margins to decrease considerably. Other reasons that make this an unattractive industry were the rising cost of raw materials at 65%, labor at 12% and transportation at 7.5%. The industry trends of in-house manufacturing, the emergence of plastics and glass were factors along with the prices and cost pressures made this industry an unattractive one. After using Porters Five Forces in analyzing the industry Crown competes in, it is appropriate to take into account the metal, plastic, and metal container industry. The metal container industry is important because this is the industry that Crown is currently in. This is not the only reason to analyze this industry. Other reasons are the fact that other companies within this industry are either diversifying into other areas or consolidating with other companies. It is also important to follow the plastic industry because this is where the segment growth is. Plastic and glass also offer another alternative for Crown to move in if they want to continue their growth. In looking more into Crown Cork, we can see how they did under Connelly while he was CEO. When Connelly took over, Crown was on the verge of bankruptcy. He immediately reduced employee numbers at headquarters and turned to a back-to-basics strategy to lifting the company up. The second step was to introduce the concept of accountability, where he gave each manager the responsibility of his plants profits. His last step was to focus on the debt the company had undertaken. To make this possible Connelly implemented a new strategy that emphasized cost efficiency, quality, and customer service. Connelly realized that Crown Cork was a small producer so he built around the companys traditional strengths in metal forming and fabrication. To provide better customer service Connelly focused on his markets and chose to spread his plants across the country so that he can reduce transportation cost and be closer to his customers. His strategy in the market was to expand its national distribution and invest heavily abroad. There are a lot of significant changes taking place in the industry right now. With all the trends going on I think Avery needs to be proactive and not reactive. Since their single product lines were not enough to differentiate them from the competition, a lot of companies have been diversifying into other sectors of the industry and even outside of the industry. The new growth segment is the plastic container industry, and this has left Avery wondering what to do next. He has several options, which is the growing opportunities in plastic and glass closures and containers. Although, Crown Cork was very successful under Connelly, the rapid change the industry is going through will not allow Crown Cork to survive if they dont innovate and try to change their strategy. Alternative Solutions Avery now needs to consider whether or not it is time to get involved in the bidding for Continental Can. If he does do this, it will make Canada Crown the largest presence outside the United States and would double the size of Crowns domestic operations. Avery has the option of taking advantage of the plastic container industry since this is where the growth segment is and the metal container industrys growth has leveled off. Avery could also continue to expand internationally in developing countries and take advantage of the cost structure over there. One of his worries is the clashing of two different cultures. He can offset this by forming an alliance, in which this will minimize the culture barrier, since the home country will have the experience and can make the transition

smoother. Another option would be to increase R&D, this could help him develop products that customers really want and put him at a proactive stance. Avery has several options that he could pursue; he could bid for Continental Can, acquire or form an alliance with another foreign firm, diversify into the plastic container industry, and increase R&D. He also has the option of just doing one of these or undertaking a combination of these which could help in the long run. For example, he could merge with another company overseas and increase sales in these untapped markets while at the same time moving into the plastic industry and gaining sales in an industry that is rapidly growing.