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QUESTION #1: How attractive is the metal container industry' The business environment within the metal container industry in the 1980’s was a very attractive market due to the existence of significant opportunities and a relatively limited number of business threats. The maturity of this market and flatting sales created a golden opportunity for agile companies willing to invest in product refinements, service quality improvements, and process innovations to gain a greater percentage of market shares. Such was the case of Crown Cork & Seal (CC&S), a company that found itself poised to become a major force within the industry. The primary strength of the metal container market is its vitality to the various manufacturing companies who are producing canned beverages and foods. Considering that 61% of all goods are packaged in a metal container, this industry represented an enormous opportunity. The durability of metal is an attractive feature, hence the $12.2 billion industry. In the 1980’s, a number of environmental factors changed the metal container industry forever. Notable changes include: material paradigm shifts (i.e. alternative materials), product format changes (i.e. two-piece vs. three-piece cans), rising materials and labor costs, fewer customers, and diseconomies of scale. While the durable nature of metal was an advantage in the packing industry, the high mass of metal added significantly to the transportation costs of products thus proving to be a threat. Logistics expense is a significant portion of cost of goods sold. To reduce shipping costs, some packaging consumers searched for alternative material solutions. A number of alternative materials began to enter the market such as glass, which represented 21% of industry market share, and plastic representing an 18% industry market share in the late 1980’s. These materials represented a continued threat to the stability of metal container manufacturers such as CC&S. Three-piece cans were the standard format in the early history of the packaging industry. However, the advantages of two-piece cans, demonstrated by the success aluminum can producers were experiencing, became all too apparent and resulted in an industry paradigm shift allowing the two-piece can format to reign. By 1989, 80% of all metal cans produced were the two-piece design. Unfortunately, two-piece and three-piece manufacturing equipment were mutually exclusive and forced businesses to invest in one technology or the other; changeover costs were significant. Industry-wide increases in raw material and labor costs coupled with major consolidation efforts within the bottling segment of the industry posed a major obstacle to CC&S. Whereas CC&S at one time had a diverse range of customers in a target-rich environment, the consolidation left the industry with a handful of major customers. Recognizing the fact that approximately 45% of their total product cost was the cost of the can or bottle, the packaging customers searched for ways to mitigate this cost. Due to the limited number of major suppliers, these companies, including Coca-Cola and Pespico, were able to exert tremendous pressure on the packaging manufacturers, such as CC&S, to further reduce their margins or risk losing the account. As packaging manufacturers increased their capital investments to expand bandwidth reflective of an impending sales escalation, the economic downturn left them with too much resource idle time. In 1980, there were 8,000 bottlers in the industry buying goods, but this number had plummeted by the end of the decade to 800 bottlers. Needing relief from the overhead expense, packaging manufacturers sought longer runtime accounts that would maximize their economies of scale by reducing setup/breakdown costs. Although these issues represented challenges to CC&S’s progress, the future looked bright for this very progressive company ready to turn challenges into opportunities within this attractive industry. ================================================================== QUESTION #2: How would you characterize the strategies of other large firms in this industry' The maturity of the market narrowed the field to six major competitors to CC&S each pursuing various business strategies: American National Can, Continental Can, Reynolds Metals, Ball Corporation, Van Dorn Company, and Heekin Can. CC&S ranked third among this group in terms of annual dollar sales of containers. American National Can (ANC) was the largest can producer and pursued a portfolio diversification campaign by entering into other industries such as insurance. ANC was successful in using their container production to procure cash that was used to develop and support alternative streams of revenue. In the 1980’s, ANC’s container business changed hands a few times, ultimately becoming owned by Pechiney. Continental Can, who had the second highest annual sales, had a history very similar to ANC. They too diversified into several unrelated industries such as insurance, energy exploration, and transportation. Continental was acquired in 1984. Their parent company later looked to divest the packaging business in an effort to become more profitable. Both ANC and Continental pursued a strategy of leveraging their container businesses as a source of income to diversify through acquisitions into other businesses. For each of them, this strategy led to being acquired, and then their container business being spun off from the more profitable components of the business. Reynolds Metals differentiated themselves by pursuing vertical integration, controlling their material stream from raw aluminum to finished cans. This integration of the full stream of aluminum processing presumably allowed them to pursue a low-cost strategy, which they were able to achieve through their superior technology and operational efficiencies. Further, they actively pursued alternative markets for the aluminum can thereby increasing the base of potential customers. Ball Corporation’s sales placed them fifth behind ANC, Continental Can, CC&S, and Reynolds. Their most notable competitive advantages were their superior technology and operational nimbleness. These advantages allowed them to realize major cost savings, enabling them to pursue a cost leader strategy. They also mastered the art of having shorter runs of high-margin, customized products. Van Dorn Company and Heekin Can were smaller competitors, who both focused their marketing strategy on addressing a variety of niche and regional markets. Additionally, Van Dorn was somewhat diversified into the manufacturing of plastic injection molding equipment. It is noteworthy that in 1988 Van Dorn was investing heavily to increase their container manufacturing capability. This could have been construed by CC&S as a threat by a small company looking to aggressively increase market share. ================================================================== QUESTION #3: What is Crown’s strategy' As shown above several capable companies, each with competitive strategies differentiating it from the others, occupy the metal container market. In the face of competition, it is necessary to step-up to the challenge by developing innovative ways to gain market advantage. That being the case, CC&S developed four strategies they hoped would lead to success. First, they took action to streamline financial exposure by minimizing costs. Reducing the number of employees by half returned CC&S to a “lean force of 80”. Job analysis provided a framework to consolidate redundant functions in the divisional accounting area. Further, internal corporate division accountants were moved closer to corporate decision-makers to expedite tactical business moves. Limiting the amount of R&D performed on new products cut additional costs. Ongoing R&D efforts became focused on improving the techniques and efficiencies of the core business thereby allowing CC&S to further reduce costs. Finally, strict inventory and product management reduced overhead and carrying costs. Second, principles of accountability, responsibility, and ownership were instilled to foster better work products. CC&S attempted, whenever possible to find local management to operate local plants. This gave CC&S roots and a stake in the community’s economy. Plant managers were made “owner-operators” with control over all aspects of the plant. Creating financial incentives and accountability to plant profitability prompted the employees to work for the mutual benefit of themselves and the company. Third, a recommitment was made to return to core competencies by concentrating on tin-plated cans and crowns. CC&S canvassed the globe searching for markets that were a proper match for their tin-plating business, which they found in aerosol and beverage applications. Due to the recovery road CC&S was on, they could not afford to have a number of business failures; therefore, markets showing signs of vulnerability were quickly exited, including the fiber-foil containers used in automotive applications. Fourth, CC&S kept close tabs on the various industries that directly affected their company’s stability. In light of the wavering steel can market, CC&S expanded operations to enable greater aluminum can production to follow market trends and customer preferences. This step further diversified their business structure enabling them to stay competitive. Fifth, Connelly recognized the importance of cutting costs to streamline the business operations. Instituting cost controls over a wide range of areas, emphasizing continuous quality improvements, and implementing just-in-time inventory procedures propelled CC&S towards a successful future. Finally, CC&S focused on the business opportunities present in international markets. Equipment that was considered outdated in the US was exported to emerging markets overseas. This allowed CC&S to increase the useful life of their equipment. ================================================================== QUESTION #4: If you were Avery, what would you do next' A battle is won when a force determines the exact spot of a potential victory, and concentrates all its fire on that spot. In the same way, CC&S is presented with an amazing business opportunity that must be seized. In the case of CC&S, acquiring Continental Can is that decisive opportunity. This eliminates a competitor from the industry, gives CC&S access to Continental Can’s customer base, as well as increases their market share. The fact that alternative container materials are continually taking market share should not be ignored, but rather put to good use. This is best accomplished by investing in the manufacturing of glass and plastic containers that meets the needs of customers in diverse markets. It is important to understand that moving into these alternative markets is a risk since there will be a learning curve, and the industry may be full of more agile competitors than their current market. Additionally, the international market is very attractive, and CC&S should continue expanding its operations to transform itself into an international business. With all that said, Avery should definitely move forward with the merger.