MGMG555 Competitive Strategy and Industry Structure
Instructor: Sarayuth Saengchan, Ph.D.
College of Management, Mahidol University
Trimester: 3/2013 Date: 01/02/2014
Crown Cork & Seal in 1989
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Agenda
Crown Cork & Seal in 1989 BackgroundProblem StatementRecommendationAnalysis
SWOT Analysis Five forces Value chain
Strategy Corporate Strategy Business Strategy Functional Strategy
Crown Cork & Seal in 1989 Background
Industry Structure
American National
44%
Other28%
Centinental Can13%
Renolds Metals
5%
Crown Cork & Seal5%
Ball Corporation5%
market share
Five firms dominated the $12.2 billion U.S. metal can industry in 1989, with an aggregate 61% market share
Price
Pricing is very competitive. To lower costs, managers sought long runs of standard items and offer volume discounts.
7%7% increase in beverage can production capacity
between 1987-198915% increase in aluminum can sheet price after guaranteed
volume prices Increase number of the major brewers producing containers in
houseThe consolidation of soft drink bottlers throughout
the decade
4%
Can industry operating margins fell from 7% to 4% between 1986-1989 because of
Customers
Top U.S. Users of Containers, 1989Coca-Cola Company
Anheuser-Busch Companies Inc.
PepsiCo Inc.
The Seagram Company, Ltd.
Distribution
Manufacturers located their plants close to customers to minimize transportation costs
The primary cost components of the metal can include
Cost
Transportation 7.5%
RM 65 %
Labor 12%
Foreign markets were served by joint ventures, foreign subsidiaries, affiliates of U.S. firms and local overseas firms.
Beverage can producers preferred aluminum to steel because of lighter weight and lower shipping costs
Manufacturing
2-Pieces Can
3-Pieces
Can
Beverage segment used two-piece cans: The two-piece can line with the peripheral equipment cost about $20-25 million per line
Food and general packaging segment used three-piece cans: The three-piece can line with the equipment cost about $8.5-9 million per line
Most plants had 12 to 15 lines for the increased flexibility of handling more than one type of can at once
Suppliers
In 1970, steel accounted for 88% of metal cans, but dropped to 29% in 1989
Being lighter, more consistent quality and more economical to recycle, by 1989 aluminum accounted for 99% of the beer and 94% of the soft drink metal canThe country’s three largest aluminum producers were
The metal container industry trend
In-house manufacture
• The continuing threat of in-house manufacture
Plastics • The emergence of plastics as a viable packaging material
Glass• Steady competition from glass
as a substitute for aluminum in the beer market
Soft drinks & aluminum cans
• The emergence of the soft drink industry as the largest end-user of packaging, with aluminum as the primary beneficiary
Diversification & consolidation
•The diversification of, and consolidation among, packaging producers
•Producing cans for their own company use—accounted for approximately 25% of the total can output in 1989.
•Much of the expansion in in-house manufactured cans, occurred at plants owned by the nation’s major food producers and brewers.
•Brewers found it advantageous to invest in captive manufacture because of high-volume, single-label production runs.
•Soft drink bottlers were also geared to low-volume, multilabel output, which was not as economically suitable for the in-house can manufacturing process.
In-house manufacture
Plastics was the growth leader in the container industry.
Plastics
1980• Share 9%
1989• Share 18%
Plastics could retain carbonation and prevent infiltration of oxygen less
than 4 months while aluminum cans held carbonation for more than 16
months
( U.S. brewers expected beer containers to have at least a 90-day
shelf-life. )
Glass bottles accounted for only 14% of domestic soft drink sales
Soft drink bottlers preferred the metal can to glass because of a variety of logistical and economic benefits: faster filling speeds lighter weight compactness for
inventory transportation efficiency
GlassGlass
The soft drink industry of metal cans shipped accounted for 29% in 1980 42% in 1989
Aluminum’s penetration could be traced to several factors:(1) weight advantage over glass and steel(2) ease of handling(3) a wider variety of graphics options provided by multipack can containers(4) consumer preference
Aluminum’s growth was also supported by the vending machine market
Soft drinks & aluminum
cans
Low profit margins, excess capacity, and rising material and labor costs prompted a number of corporate diversifications and subsequent consolidations throughout the 1970s and 1980s.
For example, American Can reduced its dependence on domestic can manufacturing, moving into totally unrelated fields, such as insurance.
Diversification &
consolidation
Major Competitors
Company History
1891 : Crown Cork & Seal Company1920 : Patent ran out, competitive became serve and nearly
bankrupted the company1927 : Crown was brought by Charles McManus1930 : 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 momentumTry to expand into plastic and ludicrous diversification into
metal bird1955 : Partnership with Connelly Container, Inc.1956 : Connelly began buying stock and was asked to be an
outside director1957 : Crown teetered on the Verge of bankruptcy John Connelly
took over the president. His recue plan was simply -- just common sense--
John Connelly’s action
To institute the concept of
accountability.
Establishing Crown managers as
“owner operators”
Plants managers take responsibility
for plant profitability and including allocated costs.
To pare down the organization.
Reduce HQ staff by half to reach
a lean force of 80. Abandoning its
paternalistic culture to simply functional
organization.
Reduce payroll by 24% and
eliminated 1,647 jobs.
Focused on the company’s debt.
Paid off the bank Introduced sale
forecasting dovetailed with new product
and inventory control.
“Climbed out of the coffin and was sprinting”
Connelly’s Strategy
Research and Development (R&D)
Crown’s technology strategy focused on enhancing the existing product line. We do have tremendous skills in die forming and metal fabrication.
Marketing and customer service
Crown’s manufacturing emphasis on flexibility and quick response to customer’s needs supported its marketing emphasis on putting the customer first.
Financing
Connelly then steadily reduced the debt/equity ratio from 42% in 1956 to 18.2% in 1976 and 5% in 1986.
International
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.
Performance
Connelly’s strategy met with substantial success throughout his tenure at Crown.
Avery’s Challenge
Growing opportunities in plastic closures and glass containers.
Acquisition of Continental Can Canada (CCC)
Problem statement
Problem Statement
Entrance into the plastic container
industry
Acquire the Continental can
company
Recommendation
Pros•Market gap in the
container industry
• Decreasing shipping
cost because of
lightweight
• Developed in various
pattern
•Made of natural
resources (Petroleum)
Cons
• Portion of metal can more
than plastic container
• Not completed loop of
recycle
• Not core competency
•Allowed carbonation to
escape in less than 4 months
Recommendation
Entrance into the plastic container industry
Pros
•Getting more market share
•Getting plastic container
line manufacturing from
Continental can
•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
Recommendation
Acquire the Continental can company
Analysis & Strategy
SWOT Analysis
Strength• Cost efficiency• Product differentiate• Customer relationship• Environmental care
Weekness• Lack of product
diversity• Short of R&D
Opportunities• Chance to
consolidation• Globalization /Pioneer
rights
Threats• Slow growth rate• Substitutable • Emerging plastic
market• Challenge from
buyers/providers
Growth Strategy: Expansion Globally
Five Forces Analysis
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New
Entrants
Rivalry among
Existing Firms
Threat of Substitute Products
(High)
(Low)
(High) (High)
(High)
Five Forces Analysis
Rivalry among Existing Firms (High)- 5-6 big competitors- Also be supplier => Reynolds Metals- New production technology => Reynolds Metals- New product design => Ball Corporation
Bargaining Power of Buyers (High)- Top 5 soft drinks (Coca- Cola Company , Anheuser-
Busch Companies Inc., Pepsi co Inc., and Coca-Cola Enterprises Inc.)
Five Forces Analysis
Bargaining Power of Suppliers (High)- Big 3 aluminum packaging producer => Alcoa,
Alcan and Reynolds Metals - Only one aluminum can producer => Reynolds
Metals Threat of Substitute Products and Services (High)- Plastic and glass- Plastic => 18% growth in 1989 (from 9% in 1980),
lightweight and more convenient
Threat of New Entrants (Low)- Vertical and horizontal integration
Crown Cork’s Value Chain
Sale Forecasting + Manufacturing
1.closing down the Philadelphia facility
2. new and geographicallydispersed plants
emphasized quality, flexibility, quick response to customer needs
flexibilityand quick response to customer’s needs
1.reduced (payroll by 24%) 1,647 jobs.
2. Change Divisional Line to “Owner Operators”
focused on enhancing theexisting product line
Corporate Strategy
Combination Strategy
Growth
Stability
Retrenchment
Expanding more market share.
Product and market are rarely change.
Changes in consumer behavior.
Business Strategy
Cost-Leadership
Recycle (Green technology)
R&D
Supply chain
Business Strategy
Product & Services
Concentric diversification strategy
R&D
Recycle (Green technology)
Functional Strategy
Manufacturing
Quality, Flexibility, and Quick