CROWN CORK & SEAL

CASE STUDY ANALYSIS

Group No 7: Saurabh Kaul Vikram Chaliyawala Devender Singh Narang

CROWN CORK & SEAL Company

Formed by a Foreman in Baltimore in 1891 Filled for patent for Crown caps Filled for bankruptcy after easing of patent. Acquired by Charles McManus in 1927 Constructed world largest plant with 52 lines Again Filled for bankruptcy in 1957 John Connelly took over the presidency. Ranked 114 in Fortune 500 over the period 1968-78 In 1989 John Connelly stepped down to give way to William J Avery

Metal Can Industry Scenario

Market
12.2

billion market with 8% growth rate in US Huge untapped developing markets with high potential ( 62 plants generating 44% of sales & 54% of operating profits Limited no. of major players

Financials
Low

Others 39%

American national can 25%

profit margins in US ranging from 4-7% Huge investment

Continental can 18%

Ball Corporation Crown Cork Reynolds 4% 7% 7%

 Five Force Analysis

Substitute
Medium
1. Shifting to glass & plastic (non biodegradable and not suited to carbonated drinks) 2. Increase switching cost due to change in machine
Threat Usage of plastic as packaging medium High performance trade-off of plastic over metal can. Opportunity Diversifying in plastic packaging industry

 Five Force Analysis

New Entrants
1. Entry barrier investment $ 375 million 2. Large Manufacturing Economies of scale 15 Lines 3. Entry Barrier Distribution 4. Entry barrier-Low profit margin 5. Low product design cost 6. NO product differentiation
Threat Shrinking Margins Opportunity Acquisition of Continental would further increase economies of scale Access to newer distribution channels

Low

 Five Force Analysis

Factors Affecting rivalry

1. Limited players 2. 25% American National , Continental -18% & Reynolds -7%, Crown & Seal -7%, Ball Corp- 4% 3. Low exit barriers 4. Intermittent over capacity 5. Large volume -120 billion cans 6. Al can 8 % growth rate, Steel can reduction of 2.6% 7. Consolidation Continental can bought by Kewiet & American national can sold to french Threat Opportunity company
Under capacity utilization. Competitors aggressive expansion in variety of direction

Diversification Entering Global Markets Sector Growth Rate 8 %

High

 Five Force Analysis

Suppliers
1. Dominated by 3 Al Suppliers 2. Price increase by 15% 3. Forward Integration by Reynolds 4. No goods alternative to Al
Threat Opportunity

Forward integration by suppliers.

Backward Integration Capacity Enhancement & capturing bigger market share Recycling of cans

High

 Five Force Analysis

Buyers
1. Backward integration by Soft drink Manufacturers by 25% 2. 55% of the beer can market share by backward integration 3. Required delivery of finished goods at short notice 4. Low switching cost to other can suppliers 5. No brand identity 6. Buyers volume 120795 millions of can 7. Low volume soft drink bottlers 8. Can constituted 45% of the beverage cost 9. Easy Threat substitution with other can manufacturers Opportunity 10. High demand for competitive price Buyers are backward integration Continental acquisition would increase its market share thereby reducing buyer bargaining power

High

Strategy Last 10 Years

Target Markets
Domestic niche in growth segments International Pioneer rights Exits Motor Oil Can Market

Financial Control
Reduce debt No Cash dividends Stock Repurchase

Labor and Personnel

Lean and Mean Low Salaries Stock Option incentives Straight line Management

Manufacturing
Small plants located close to customer Process innovation\cost reduction Just in Time Focus on Core competencies Re-cycling

Cost Efficiency and Improving Quality

R&D
Work closely with customers Not expend heavily on R&D

Marketing
Close ties with customers Provide technical assistance at customers plant

Secret of Success - I

Low levels of financial leverage compared to competitors (reduced from 42% to 18%) Good liquidity due to divestment; used to repay short-term bank debt ROE highest one in the industry at 15.80% Low /consistent ROS of 4-5% Operating ratio of 8-9% consistently , however high operating ratios of 15-18% from the rest of the world markets High operating efficiencies , low SGA per sale of 3% vis--vis 58% in the industry ( American can company around 15%) Very low debt to equity ratio Consistent cost of goods per sale of 85% International operating ratios is consistently improving from 14% to 18% (1986 to 1988) Net sales in 1988 - $ 1834.1 Million and Profit - $ 93.4 Million

Secret of Success - II

Flexibility to customers need & High response time. Operational Excellence using basic innovations Treating employees as owner operators and created trust and support to the employee Emphasized on tin plated cans & crowns Stressed on continual improvement Capturing developing markets in the very initial stages Entry in profitable Aluminum recycling industry. Expansion to international markets with heavy investment abroad Expand national distribution Locating the plants close to customer. Serving multiple customers

Averys Challenge
Growth Slow down in metal containers Plastic was only growing segment Problems in merger of America Can and National Can

Challenges

The Big Questions

Should Crown diversify into Plastic Containers? Should Crown Bid for Continental?

Suggestion-1) Acquisition of Continental Can

Post Acquisition Benefits The market share will catapults from 7% to 25% making it on par with American National Can Double the sales Analysts expects increase in demand from the soft drink business But the repayment of debt for the acquisition should be easy Connelly frugality and Crowns strong cash flow

Suggestion-2) Diversify into Plastic Business

Post Diversification Benefits Reduce bargaining power of suppliers Risk Pooling Emerge as market leader rest is shared by small players. High growth in plastic business due to light weight, handling convenience resulting in customer acceptance

Thank You