GLIM-PGDM-SM

Lesson 1
Crown Cork and Seal Company, Inc

Case Study
 Discussion Questions
1. What are the most significant factors affecting competition in the metal
container industry?

2. What strategy does Crown Cork have for competing in this industry?

3. What advantages, if any. Does a firm the size of Crown Cork have over American
Can and Continental Can? How do to you explain the comparisons shown in
Exhibit 3 in the case?

4. What recommendations would you make to management?

 Strategic Questions
• What business are we in?
• Who is our customer?
• What are the business choices?
• Where do I compete?
• How do I compete
 What is affecting the business?
Suppliers Industry Rivalry Buyers Substitutes Exit Barrier

There are very few Few firms Beverages Plenty Modest

suppliers Growth is slow Colas
It is a very large market Plastics
These suppliers are large ( Tough price competition Beer
SteelI- powerful Fixed costs are relatively Fibre
high Juices et
Probably dictate prices to Little product Aluminium
the manufacturing firms differentiation Certainly big
Little value added Glass
High transportation costs
Close substitutes exist
Two-piece cans have
brought change to the
industry
 Analysis: Key Factors

1. Metal can manufacturers seem to be Caught between strong suppliers and

Strong customers.-

2. Industry growth is slow.

3. Close substitutes exists.

4. The cost structure of the industry.

 Value Chain Analysis
1. Production
concentration on aerosols and beer and soft drinks

2. Manufacturing
many smaller plants with extra can-forming line- advantages?

3. Research and development

follower strategy

4. Marketing
use of sales engineers—relationship based marketing?

5. International
emphasis on less-developed countries

6. Finance / Balance Sheet

reduce debt and buy back shares
 Analysis

1. Beer and soft drinks represent growth areas in the metal container industry.

2. 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.

3. Aerosol cans build on existing strengths of Crown Cork & Seal.

4. When we look closely substitute materials also have limitations-

odor/reactivity/limits to down guaging
 Summary
On marketing :
What extent sales or selling is important in the metal container industry.

Selling done rather infrequently in the metal container industry and can probably be
handled by a few sales executives with a lot of help from top management—does not
feel like a daily sales call type business
On the international side…..

1. These countries are most likely to make the most of Crown Cork & Seal’s entire
product range, beginning with crowns and gradually moving up to three piece and
two-piece metal cans.

2. Growth is rapid in these areas.

3. Suppliers and buyers are unfamiliar with the technology in these countries, making
forward or backward integration very unlikely.

4. There are very few competitors in these countries.

 What are the risks of diversification?

 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.

PESTLE + ANSOFF
 Identification of Problems
1. The retirement of John Connelly

2. The banning of aerosol containers that use fluorocarbons

3. Legislative regulation of nonreturnable containers

1. The strategy is indeed risky. Crown sees itself as being in the tin-plate
container business for aerosol and beverage cans. Broader definitions – tin-
plate containers, metal containers, or packaging – imply less risk for the
company.

2. On the other hand, Crown has been earning above-average returns. DO

these returns justify the risks?
 Recommendations
Three broad categories of recommendations :

1. Recommendations to radically change Crown Cork & Seals’ strategy

- moves into different types of materials and markets

- diversify from Crown’s narrow base in metal cans

2. Political Action/Lobbying

- Crown Cork & Seal should support the efforts of its trade association to prevent the
ban on fluorocarbons and
- to prevent the enactment of legislation regulating use of nonreturnable cans

3. Pressure on both its suppliers and customers

- to respond to both the ozone and nonreturnable threats

 What Strategic choices did they
address
• Growth?
• How to compete?
• Export?
• Export what?
• Diversify?
 What happened Later- 90’s
• Total Return to shareholders in Connelly era (
30 years) was ~ 20%
• Stock price appreciated at CAGR of 19.5%
• This put CCS ahead of IBM and DuPont !
• CCS ROE was 15.8% vs 10.7 and 7.1 of near
competitors
 Later on 90’s ---
• CCS bought Continental canada @330mn in
‘89
• Bought Continental US @336mn in’90
• Diversified majorly into plastics , bought
Constar in ‘92
• Bought Van Dorn in “93
• Strong line in plastics
• In ‘94 sales was $ 4.4 bn and Net Income 131
Mn
• In 2012 sales of $ 8.5 bn and Net Income $826
• CCS spent 1.6 bn in acquistions
• In ‘94 expanded into food cans
• Moved rapidly overseas – China, Korea, RSA ,
South America etc
• JV in Vietnam
• Re organised into 4 divisions
– North America
– International
– Plastics
– Machinery
 Avery out, back to the basics
• New CEO, John Conway, evokes strategy of Connelly
– difficult to return to bare-bones corporate culture of the
past
– 2003 SGA/Sales 5.1%

• Divested Constar International (plastics) Nov 2002

• Focus on repairing balance sheet & paying down debt

• Consolidation in the metal can industry

– Post 2001, looks like a 3-firm oligopoly, with each firm
selectively taking out capacity
 Summary
• Strategy has many facets . Multiple
definitions
• All choices have a potential reward and
attendant risk
• There is no such thing as a permanent
strategy-evolves over time
• Value seeking evolution to match changing
environment.
 Crown Cork & Seal Update
Acquisitions:

1989 — Purchases Continental Can Canada ($330M),

Continental Can US ($336M)
1990 — Purchases Continental RoW ($125M)
1992 — Expansion into plastics: Constar purchased ($515
M) and Van Dorn ($175M)
1993 — #2 supplier of metal containers (Pechiney #1)
1996 — Acquired CarnaudMetalBox (France) for $5.2B in
stock and cash (largest acquisition of a European firm
by an American one at the time) becomes #1
supplier of metal containers
 Crown Cork & Seal Update
International Expansion:

1993 — Builds beverage can and plastic cap

production lines in UAE, Jordan, Argentina,
and Shanghai
1994 — Expansion into Vietnam via JV with two
local companies, plans to produce 400M cans
per year
1994 — Announces Beijing JV, its 3rd in China
 Crown Cork & Seal Update
Management:

1989 — William Avery compensation exceeds $2M,

putting him in the top quintile of Fortune 500 CEOs
 Continuing restructuring: more than two dozen
plants closed between 1991 and 1995
1992 — Firm re-organized around 4 divisions: North
America, International, Machinery, and Plastics
2000 — William Avery steps down
CCS Performance is excellent through
1996 …
Relative Performance of Crown Cork & Seal vs. S&P 500
(1989 - 1997)

400
CCS
350
Adjusted Closing Price

300
(1/3/1989 = 100)

250

200
S&P 500
150

100

50

0
1/3/1989 1/3/1990 1/3/1991 1/3/1992 1/3/1993 1/3/1994 1/3/1995 1/3/1996

Week Ending

• Net sales increase to $8.3B in FY 96 from $1.8B in FY88

– growth fueled mainly through acquisitions (financed by debt)
• Net income increases to $294M in 96 from $93M in 88
 … but hit by a “perfect storm” in
1998 & 99
Relative Performance of Crown Cork & Seal vs. S&P 500
(1989-present)
600
Adjusted Closing Price

S&P 500
500
(1/3/1989 = 100)

400 CCS + 333%

300

200
CCS
100
S&P 500 + 581%
0
9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4
1 98 1 99 1 99 1 99 1 99 1 99 1 99 1 99 1 99 1 99 1 99 2 00 2 00 2 00 2 00 2 00
3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/ 3/
1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/

Week Ending

• Overcapacity in Europe (50% of sales) leads to pricing pressure

• US Soda bottlers raise prices, stemming growth in demand
• Higher oil prices
• Major U.S. customer goes Chapter 11
• Asbestos litigation
• Credit Rating dropped to below investment grade
 Avery out, back to the basics
• New CEO, John Conway, evokes strategy of Connelly
– difficult to return to bare-bones corporate culture of the
past
– 2003 SGA/Sales 5.1%

• Divested Constar International (plastics) Nov 2002

• Focus on repairing balance sheet & paying down debt

• Consolidation in the metal can industry

– Post 2001, looks like a 3-firm oligopoly, with each firm
selectively taking out capacity
 Overview
• While industry analysis indicated that the
container industry was extremely competitive
• We saw that CC&S prospered in spite of this.
 How much does company position
matter?
Average Economic Profits in the Steel Industry, 1978 - 1996
ROE-Ke Spread
40% Great Northern Iron

30%

20%
Worthington Inds
Nucor
Steel Technologies
10%
Oregon Mills
Commercial Metals
0%
Carpenter British Steel PLC
Birmingham Cleveland-Cliffs
Quanex
(10%) Lukens USX-US Steel
ACME Metals
Ampco
Inland Steel
(20%)
Armco
Average Invested Equity ($B) WHX Bethlehem
(30%)
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15

Source: Ghemawat, Strategy and the Business Landscape

 More on Company Position
• Company position is intimately linked with a
company’s strategy
• While CC&S’s rivals largely adopted
diversification strategies…
• CC&S chose a focused strategy based on
appealing to profitable segments of the
market
 Key note:
I like to end the case and
finally with a discussion of some broad questions:

1. Has Connelly chosen an appropriate balance between risk and return in

his corporate strategy? Can you make this or any other business strategy
risk-free?

2. Will Crown Corm & Seal become another Head Ski or Volkswagen?

3. Would you bet against the future success of Crown Cork & Seal?
Thank you…