Crown, Cork & Seal

8 August 2016

As many successful companies do, Crown Cork & Seal began with an idea—one that had the potential to improve the world in which we live. In 1891, a machine shop foreman conceptualized a superior method for creating bottle caps, and set about to do so. Crown Cork & Seal was born, and what followed were intermittent periods of triumphant achievements and costly missteps, soaring profits and depressing losses, eventuating in a successful company with rich tradition and history.

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However, the competitive business environment slows for no one, and the company finds itself constantly reevaluating its strengths, its competitive advantages, and the viability of the industry in which it has built its legacy. Industry Outlook One of Crown Cork & Seal’s foundational questions involves their industry in general—is it an attractive industry in which to compete? Like most industries, there are things that make the metal container industry an advantageous one, and there are elements of the nature of the industry that are troublesome to its members.

The low potential for new entrants does provide somewhat of a safeguard against fresh competition; however, the strong buyer power, high threat of substitutes, and intense competition from rivals makes the industry relatively unattractive on several key levels. For potential new entrants, the metal container industry does not seem to be attractive due to the high barriers to entry. Most of all, the economies of scale provide current players with economic advantages that would be extremely difficult to reach for new entrants.

Additionally, the saturation of the market does not make it very attractive to new entrants, as competition for current sales is so intense. The high barriers to entry are, however, an advantage for current producers, which do not have to be scared by the arrival of new competitors. When viewing the industry through the lens of the buyers, the main consideration is the price, since the products are definitely undifferentiated and offer low switching costs.

The idea for companies in the metal container industry is therefore to reduce shipping and managing costs. In this quest to always obtain lower costs, some buyers even started to produce their own metal cans (major beer producers making 55% of their necessary cans). Therefore, the power of buyers is relatively high, which weakens the producers’ power in this industry. On the supply side, various factors exert influence over the power of suppliers, leaving it relatively benign.

The superior quality and recyclability of aluminum compared to steel leads to a higher demand for aluminum; however, the price is still the main constraint, and aluminum costs have to be limited to prevent steel from increasing its market share (which explains Alcoa‘s decision to limit prices). Some producers are also suppliers of raw materials (Reynolds Metals) and benefit from advantages that other companies don’t have access to (Crown, for instance).

The cost of aluminum also tends to grow (even with the limitations in order to compete with steel), but on the other side, the overall capacity of production has really increased from 1987 to 1989 (7%), offering more latitude to the producers. The threat of substitutes in the industry is a powerful force, especially domestically. As plastic gains traction and technologies advance (possibly increasing the ability to preserve carbonation in plastic containers), this pressure is only likely to increase.

The existence of many substitute products (glass, steel, plastic, etc. ) is another constraint on prices, especially given the high percentage of production costs per can due to raw material (around 65%). Finally, due to the importance of keeping prices low, the industry is run by fierce price-based competition to maintain market share; the main companies in the industry also utilize volume discounts to provide more attractive offers. But once again, the fierce competition based on prices reduces the attractiveness of the industry, where margins tend to be tightened.

Despite important barriers to entry that protect current producers, the industry is not very attractive mainly because of its saturation that offers very few opportunities and its price-based competition that lowers the margins. Rivalry is fierce over prices, and customers benefit from a real power over the producers. Strategic Positioning Most great organizations can trace a portion of their success to a visionary, a leader, or a champion of some sort. For Crown Cork & Seal, that leader was John Connelly. Connelly took over the presidency of the company in 1957, while the company was on the brink of bankruptcy.

His overall strategy focused on controlling costs while prioritizing quality and service. Connelly reduced staff, discarded the divisional accounting departments and central R&D facility, and increased accountability through the organization. His approach kept Crown Cork and Seal from bankruptcy and on a road to exponential growth in profitability (1,646% increase in profits from 1957-1961). Products and Markets: Crown positioned itself as a small producer in the industry, and therefore targeted specialized uses and international markets, as well as focusing on their current high-competency area of tin-plated cans and crowns.

When fiber-foil cans encroached the market of motor oil, Crown exited the oil can market and targeted beverage cans and the aerosol market in the US. In response to the emerging soft drink industry, Crown specialized in two-piece steel cans and began to design its equipment to allow for rapid changeover. The company also improved flexibility to accommodate just-in-time delivery. Emphasizing the needs of the industry allowed Crown to gain competitive advantage and economic scale to lower the cost.

Production process: Crown reorganized its manufacturing facilities, increasing the number of facilities across the country but decreasing the size of each facility. New facilities were located near customers to reduce transportation cost. Crown not only kept more inventory to accommodate urgent customer demand, but also improved the quality control process to improve efficiency and lower costs. As the selling price for metal cans decreased and the profit margin diminished, manufacturers had to compete with qualified products and deeply discounted prices.

Research and Development: Crown did not consider itself pioneers, therefore the R&D strategy is to enhance the existing product line, such as adapting to customer needs. This strategy allowed Crown to meet customers’ expectations and innovate organically without large research expenses. Marketing and customer service: Crown emphasized the quality of customer service. Sales forces maintained close relationships with customers, and other functions such as R&D and manufacturing worked to accommodate the customers’ needs. With the consolidation of soft drink bottlers, buyers’ power increased.

Crown believed that it had to provide better customer service to maintain the customer relationships and grow sales. Finance: Crown paid off its debt by reducing inventory and liquidation, repurchasing preferred stock and halting dividends, all of which improved the financial performance of Crown. The debt ratio dropped from 42% in 1956 to 5% in 1986. International: Due to the transportation cost, shipping products to overseas market was not profitable; therefore, Crown invested heavily in developing countries to meet the demand of international markets.

Crown’s overseas subsidiaries hired local people to serve the marketplaces, and used obsolete equipment from US facilities that was adequate to serve the needs of these emerging markets. Strategy By 1989, Crown Cork & Seal had moved from an innovation-focused strategy with a central decision maker, to an owner-operator strategy that gave individual managers more control. Connelly had developed this functional approach to help realign the company around three key pillars: (1) lower costs, (2) improve quality and (3) best-in-class customer service.

According to a Crown spokesperson, this new strategy made certain that everyone in the company was held accountable. With those strategic pillars in place and the company’s “back to basics” system of activities, it is most likely that Crown would target customers with high customization needs as well as customers in developing countries. In a highly saturated, commoditized, and price sensitive market, Crown’s only point of differentiation was their quality and service. These core strengths are best suited for a target that had more intense service needs.

The developing market aligned well with Crown’s non-risk approach to innovation. They were able to use older machines in these areas and were not as susceptible to the risk of substitute products. Crown creates value with the high-customization target by providing unprecedented customer service, quick turnaround on projects, and a tailored R&D team that works directly with the customer to find solutions for their business needs. Crown captures this value by marketing their quality and promoting constant improvement within the organization.

Because of the ownership model, managers in different plants can capture value faster for clients with immediate fulfillment needs, as opposed to having to go through a system of approvals within Crown. To create value with the international market, Crown uses a national management system. They lean on the local managers to determine consumer needs and to provide consistent quality in developing nations. They capture this value through their “pioneer rights” strategy that allows them the first right of refusal on new contracts. Through this partnership, they lower the threat of rivals and increase barriers to entry.

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