Questions 2

Crown Cork &
Seal in 1989
Strategic Management
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Q1 What is the industry of crown and carry out industry attractive test?
Ans. The issue that are:
Metal containers are very slow growth, plastic, and glass forecast to make a significant entry in
the market. If yes then in what segments and should they build their capability to acquire
someone?
Here we carried out a straight forward five force structural analysis of the can manufacturing
industry.
Porter’s five forces analysis is the tool for understanding the competitiveness of the business
environment.
This will help to identify the forces which directly or indirectly affect the profitability of the
organization. According to that, we will able to adjust our strategy accordingly.
New Entrants:
The barrier to entry is low. There are more than 100 companies in the market which contribute
only 39% of the total can market. And remaining 61% was covered by 5 firms like American
National Can (25%), Continental can (18%), Reynold’s Metals (7%), Crown cork & Seal (7%).
In 1989, Then three pieces can manufacture shifting into two pieces.so the capital cost barrier is
the return on investment which, in turn, will be driven by:
1.Size of the market

2.growth rate of the market
3.The market share that future investment will get.
Substitute:
There are many substitutes for metal containers: glass, plastic, paper, fibers foil, paper, and
plastic combinations, etc.
Increasing in the metal price can be met with a shift to glass and plastic by brewers of soft drink
bottlers.
Buyers:
Buyers are divided mainly into three segments:
 Large breweries
 Soft drink bottlers and
 Food companies
The can is very important to buyers since it represents up to 45% of the cost of, say, a canned
soft drink.
Companies generally prefer to buy large volume s that affect their economics through a long,
continuous run with few production changeovers.
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.
Backward integration some of the buyers stated their manufacturing of cans to satisfy their own
needs.
Supplier:
Suppliers are the major aluminum and integrated steel companies

Aluminum companies—Alcoa and Alcan combined represent 65% of the aluminum can stock
market.
The aluminum market is the classic example of oligopoly (few suppliers and a large number
of buyers) with few suppliers and price leadership exercises.
Rivalry:
Generally, a can manufacturing industry is low growth, capital intensive, somewhat cyclical,
commodity product industry.
Although, Aluminium had grown rapidly in the past at the expense of steel. Margin have fallen
significantly in the recent past as raw material prices rose and rivals were unable to pass on that
cost to the customers.
The main strategy for crown is that they focused on cost efficiency, quality of the product
and customer services.
By using formula,
Price -Cost = Profit
Here they are charging identical price in the market, by providing technical assistance to
the customers and specific problem-solving at the customer’s plant.
Q2 How well Crown did under the leadership of Connelly and what were the key to their
success.
Ans. In the competitive structure of the can industry, Crown Cork’s performance was
outstanding by any measure. Connelly’s entire 32 years the stock appreciated at a compound rate
of 19.5% of Crown Cork. Also, the duration of his tenure, this is a very impressive record. In the
1968-1978 period, Crown Cork was ranked 114 in total return to shareholders, well ahead of
both IBM (rank 183) and Xerox (rank 374) that would have been considered high performers. As
the 1978-88 period, Crown Cork ranked 146 ahead of DuPont (rank 154) and IBM (rank 289)
along with a compound rate of 18.6% even though this included a period of weakened
performance in the early 1980s. The limited number of evidence that we have on competitors in
the container industry is that Crown Cork’s ROE was 15.8% for much of the 1970s versus 10.7%
and 7.1% for Continental Group and American Can, respectively.
Connelly’s strategy:
Product line: Connelly focused on the beverage and aerosol cans, the so-called “hard to hold”
segments. These were high-growth segments when he committed to them and they continued to
grow towards throughout his tenure. As he committed to a focused strategy, early on he exited
the oil can segment when fiber foil came in, even though they had over 50% of the segment.
Also committed towards the international expansion at an early date and had strong positions in
closures and the manufacture of filling equipment.
Marketing: From the beginning customer satisfaction was emphasized, as well as being close to
their customers for better services. He believed that “fast answers get customers.” The keys were
quick responses to customers, high levels of customer service in the market, and just-in-time
inventory deliveries. Connelly was committed to customer satisfaction like his impromptu trip to
Florida to respond to a customer’s problem.
Manufacturing: The company built 26 plants around the United States to be close to customers.
They never built a plant for a single customer to avoid too much dependence. In the early years,
the capital intensity was relatively low, Crown kept extra lines in setup condition for immediate
response. Moreover, some plants kept up to one month’s inventory on hand to provide a quick
response. Strong emphasis was on continuous cost reduction. The emphasis on quality with a
belief that better quality helped drive costs down through a few manufacturing rejects and also
customer service problems. The company invested early in two-piece lines to gain experience
and first-mover advantage.
Research and development: Connelly eliminated the Crown’s basic research as unnecessary
and costly. R&D emphasized continuous cost reduction in consecutive years and solving
customer problems. Also, customers were helped with problems from plant layouts to designing
a new dust cover. For instance, Crown was also designed and manufactured filling equipment
gave them a core competence that permitted them to assist their customers with equipment and
layout problems. The company’s limited product R&D emphasis was on being a quick follower
of any innovation. Moreover, a low-cost responsive capability.
Organization: Connelly emphasized the decentralized responsibility at the plant level. The plant
managers were developed to be “owner-operators.” Tight financial control at corporate but most
of the other decisions are made at the local level. The company exceedingly cost-conscious and
tight control of overhead expenses. It is important to point out that SG&A as the percentage of
sales was kept very low and continuously decreased throughout the Connelly’s tenure. The very
frugal Spartan atmosphere throughout the organization.
International: A key to Crown’s success was Connelly’s early commitment towards an

international strategy. Crown’s strategy was to target the developing countries and obtain
“pioneering rights” which guaranteed limited or no competition, tax holidays, low wages, and the
market for their products. As “all others” (i.e., non-U.S. and non-Europe) account for 19.7% of
sales, but 38.9% of operating profits in 1988. The operating ratio is 17.9% for all others vs 6.6%
and 7.5% for the United States and Europe, respectively. By the 1988 Crown had 62 plants
outside the US, with a substantial number located in developing countries.
Finance: Crown’s strategy had been to eliminate preferred stock, any dividends on the common
stock, and continued reduction in the long-term debt. By 1988, long-term debt, as a percentage
of the total capital, was less than 2 percent, which is essentially no long-term debt at all. One
could argue that their focused strategy was potentially at risk to any forces that would eliminate
the segments on which they focused, for Ex., substitution risk from plastic bottles, or
environmental concerns with aerosols. The conservative financial strategy that would offset these
risks. A well-known feature of the financial strategy was the continuous repurchasing of stock.
This had the effect of increasing earnings per share (EPS) and driving the stock price up in the
market. As Connelly owned a substantial number of shares but paid himself a relatively low
salary, this was the key to his collection of wealth. Through most of his tenure, the tax laws
strongly esteem the capital gains over dividends.
Overall: Overall analyzing the Crown’s strategy is how each functional policy is consistent with
its overall strategy of being a focused, customer-responsive company. However, their higher-
level customer service helps get them the business but probably does not get them much of any
price premium in such a highly competitive industry. The strong financial performance of Crown
Cork relative to others must be driven by their overall low-cost position in the industry.
At the broadest level, Connelly had the vision, developed the strategy, and created a culture that
positively reinforced his strategy. He led by example, hard work, and frugality. He was very
demanding of his people and generated strong loyalty from them. He set demanding goals for
the organization that generally achieved them. So, he continually stretched the organization.
Q3 In light of changes happening in the industry how shall Avery respond? Is it time to
change the Crown strategy?
Ans. With the changes happening in the industry Avery must consider the following:
 Diversification of business in plastic closures and containers, as well as glass

containers. In the 1980s, plastic was the growth leader in the industry. The share
of plastics increased from 9% in 1980 to 18% in 1989. Industry observers had
forecasted plastics as the growth segment for the container industry.
 Bid for Continental Can increase market share. Continental Can have a market
share of 18% and was among the top four firms in the market. Moreover,
Continental Can have been a financially stable container company. The revenue of
Continental increased every year without any interruption.
Avery can reduce Porter’s five forces by diversifying in plastics and glass
containers. It will reduce the threat of substitutes, suppliers, and buyers.
Yes, the Crown should change their strategies to respond to the major changes occurring in the
industry and to remain competitive in the market. The alternatives which proved to be of high
quality and low cost emerged as a potential threat for the already existing aluminium industry.
Thus the company is recommended to strategize and shift its focus to the plastic industry.
Moreover, the plastic packaging industry has less competition and also has the advantage of
lighter weight and reduced shipping cost than aluminium. They can also consider bidding a part
of Continental Can’s packaging operation to increase their market share. Thus it will increase the
company’s revenue.
Q4. What are the key strategic issues that Avery needs to consider? What strategic options
are open for him?
Ans. The key strategic issues that Avery needs to consider are as follows:
1. The metal can industry may face a decline towards 1990 as plastics are becoming more
dominant in the market.
2. Continuing crunch in the margin in the united states and Europe.
3. Consolidation of beverage manufacturers from 8000 to 800 in the last decade providing
them higher leverage.
4. Innovative technology in can making has opened the necessary routes for diversification.
5. Pechiney purchasing American national and Continental can put up for sale by Peter
Kiewet.
The strategies open for him are as follows:
1. To stick with John Connelly strategy that provides superior customer satisfaction, low-
cost industry position, international expansion and to expand the product line to a
growing segment with similar customer requirements.
2. To buy all or part of Continental Can.
3. Diversifying into plastic packaging is expected to have an attractive future.
4. Diversifying into an unrelated market.
5. To sell the business as the industry is not expected to have a bright future. At this point,
the company’s current market price is at an all-time high which would attract potential
buyers.
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Crown Cork &

Ans. The issue that are:

1.Size of the market

Buyers are divided mainly into three segments:

 Soft drink bottlers and

Suppliers are the major aluminum and integrated steel companies

International: A key to Crown’s success was Connelly’s early commitment towards an

 Diversification of business in plastic closures and containers, as well as glass

2. Continuing crunch in the margin in the united states and Europe.

The strategies open for him are as follows:

2. To buy all or part of Continental Can.

3. Diversifying into plastic packaging is expected to have an attractive future.

4. Diversifying into an unrelated market.

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