Crown Cork and Seal

Published: 2021-07-01 07:44:13
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Category: Metal, Manufacturing, Bank

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Crown Cork and Seal Competitive Environment Analysis Exercise Corporate Purpose Crown Cork and Seal had three segments Metal Containers (cans), Closures (crowns), and packaging equipment. Metal containers are cans used in things such as soft drinks or aerosol cans. These were made from steel until being switched over to aluminum in the early 80’s. Crowns which are closures for any type item such as a jar. “Metal containers generated 65% of Crown’s $1. 88 billion 1988 sales, while closures generated 30% and packaging equipment 5%. ” The mission of Crown Cork and Seal was to “be successful. To do this Connelly had to take control of cost. He did this by first trimming the workforce by letting go anyone not needed which reduced payroll by 24%. “The second step was to institute the concept of accountability. ” He did this by instilling pride and a sense of workmanship in the employees. He also gave plant managers “responsibility for plant profitability” as well as quality and customer service. Last but not leased he focused on the company’s debt. He paid off the banks through “inventory reduction and liquidation. ”His vision and strategy for the future emphasized “cost efficiency, quality, and customer service. Connelly did this by focusing on the company’s strengths. He was able to improve on their strengths by focusing on the beverage can and new aerosol market. Simultaneously, he improved manufacturing including adapting to customer needs. Environment Analysis: General Environment: Demographic: 1989 over 120,795,000 metal cans were sold. Socio-Culture: The movement away from metal cans to plastic and glass has been a problem as they gain a bigger market share. Political-Legal:Political will play a big part in recycling and the push for “going green. This will also take effect for the legal aspects as new laws will be in place for more recycling and cleaners running manufacturing plants. Technological:Shut down old out dated plants and opened up new plants across the US with new equipment. Economic: As higher gas prices hit lighter products such as plastic will be more economical to ship to customers verses a heavier metal can. Global: Connelly focused on international growth. He specifically targeted developing countries. Soon foreign plants generated 44% of sales and 54% of operating profits.
Competitive environment: Buyers The competitive environment for the buyers appears to favor the buyers over Crown Cork and Seal and its competitors for many reasons. Major buyers in this industry include Coca-Cola Company and Incorporated, Anheuser-Busch, and PepsiCo. In other words there are a low number of buyers, all of which are very large and powerful companies. The size distribution is mostly centered on these major buyers; however there are other companies such as Seagram’s, Molson, and Labatt. Because there are so few companies for CCS to sell to, a high percentage of sales are dependent on these buyers.
This low number of buyers is due to consolidation within the soft drink segment, from 8,000 bottlers in 1980 to about 800 in 1989. Generally 45% of the total cost to buyers went into purchasing the cans. Due to the total cost of cans, buyers try to maintain many relationships with many can makers to increase bargaining power and reduce costs. As a result of this the buyer is not heavily dependent on one single can company. Switching costs are also lower for buyers for the same reason; they already have many resources to choose from. Buyers also are likely to profit fairly well compared to can manufacturers.

Can manufacturers must maintain low prices in order to compete with each other to gain share over these very few yet powerful buyers. Some brewers are avoiding switching costs all together through backward entry into the market. By 1989, due to production of cans by “captive” plants, 25% of all can output was produced by captive plants. By 1980 brewers had capability to supply 55% of their can needs. As a result threat of backward entry is very likely for brewers. It is easier for brewers to do this because they make high-volume single-label products.
While at the same time soft drink industry could not easily do this because they focused on low-volume multiple-label products. The aluminum can has three major substitutes buyers can choose from: Plastic bottles, which constituted for 11% of soft drink sales in 1989 along with a growth rate from 9 to 18% from 1980 to 1989; Glass bottles, which constituted for 14% of sales in the soft drink industry in 1989; and steel cans. The aluminum can however is a unique and valuable product to the industry, which is why they constituted for 75% of total sales in 1989.
As stated in the case aluminum has many advantages over its substitutes. Aluminum is lighter than glass and steel, aluminum is easy to handle and fill, aluminum allows for a wider variety of graphics options, and also consumers prefer aluminum. Because this product is so unique and advanced, it absolutely increases the buyer’s product quality. Cans have a longer shelf life than plastics and bottles, they are lighter and easier to handle, and since they are coated with a protected seal inside the can taste is not sacrificed. All of which add value and quality to the finished product given to be consumed.
Suppliers There are three large aluminum suppliers: Alcoa, Alcan, and Reynolds Metals. Alcoa is the largest producer of aluminum with sales of $9. 8 billion, Alcan ranked a close second with $8. 5 billion in sales, and Reynolds Metals is ranked second in the united states with sales of $5. 6 billion. The percentage of our supplies that come from large suppliers are 21% aluminum and 23% steel. Crown Cork and Seal represents 61% of sales for large suppliers. The supplied product is unique in that they have injected the aluminum cans gas to help the metal retain its shape.
This allows the cans to hold more than just caffeinated beverages. Also, the steel is produced thinner to cut costs and weight and there are even steel/ aluminum mixes. In addition to aluminum and steel, there are glass and plastic suppliers that offer unique products based on function. There are always substitutes for a particular supplied product. With the advancement in technology, a cheaper, lighter product could be developed or a new innovative product could be discovered. For example: Bottling has transitioned over the decades from being primarily glass, then to steel, and now aluminum.
The cost for switching a particular supplied product would be $20-$25 million based on the finding of switching from three piece to two piece cans. From reviewing the case, there does not seem to be a supplier that is excessively profitable. Even though Alcoa has the largest share of the market making $9. 8 billion in sales, Alcan is not too far behind with the $8. 5 billion. The other suppliers could always come out with a product which would give them a greater competitive advantage, and give threaten Alcoa’s top ranking position.
In addition to profitability, there is a great likely hood to forward entry by a supplier. Reynolds Metals, who is a supplier, sold over 11 billion cans itself. The supplier’s product is very important to our product quality. The difference between the value of resources used and the value of the aluminum can to the brewer makes up the surplus value between what the supplier sells the aluminum for and what Crown Cork and Seal can get for it. Competitors Entrants There are a number of threatening entrants to the can manufacturing business.
As the market continues to see more suppliers producing cans, and more brewers skipping the middle man (can manufacturer), the threat becomes more serious. Substitutes The shift towards plastic bottles, and perhaps more innovative materials are the threats to substitutes for cans. Corporate Profitability and Productivity: Please See Appendix A Threats to Competitive Equilibrium A 10X force that may come from the general environment to greatly disturb Crown Cork and Seal’s equilibrium in the market might be a socio-cultural shift to be more health conscious.
This may hurt the soft drink industry especially hard since they are so high in sugar and there is an epidemic of diabetes and childhood obesity in America. In 1989, soft drinks accounted for more than 50% of the beverage industry. If the health craze were to gain momentum, it could cut into soft drink sales severely. This would increase the market for water and juices. However, water and juice tend to come in plastic containers for the most part. Crown, Cork & Seal never got into the plastics market and this could be a huge problem for them.
If they do not find a new market for their products they might be left out in the cold once a health revolution occurs in society. The impact on sales would be overwhelming. This would bring profits way down and they may even start to have losses if they do not make adjustments fast enough. Their assets may also decrease in value because there would be less demand for can making machines due to an increase in the need for plastics making machines. With this massive shift in end-user sentiment, Crown, Cork, and Seal would have trouble convincing investors and banks to bet on them thus increasing their cost of capital greatly.
A 10X force from the competitive environment could come from Crown, Cork, and Seal’s buyers, especially soft drink bottlers. There has been a trend of consolidation among soft drink bottlers and they have used this to gain leverage over their suppliers and get discounts for their bulk orders. If they were to continue with this trend of consolidation, it could create a scenario in which the bottlers could make their cans in-house cheaper than ordering them from companies like Crown, Cork, and Seal. This would be devastating for Crown, Cork, and Seal to say the least.
Since soft drink bottlers are Crown, Cork, and Seal’s largest buyer, this would likely put so much stress on the company that it would eventually become obsolete unless the trend changed or the company shifted their focus before it was too late. This 10X force would bring sales way down for Crown, Cork, and Seal. Even if their sales were not hit as hard as possible, their profits would likely suffer anyway because of the pressure their buyers would be able to put on them with the threat of in-house can manufacturing.
Their assets would not drop too much in value because there would still be a market for can manufacturing equipment in this scenario. Crown, Cork, and Seal would likely find it more difficult to attract investors to their company and even their cost of debt would increase with a likely decrease in the rating of their bonds. These two setbacks would drive up their cost of capital and make it difficult to raise money to shift their focus if they wait too long to do so.

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