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