Crown, Cork And Seal Exec Briefing

Executive Briefing: Crown, Cork, and Seal

Overview of the metal container industry and Crown, Cork, and Seal's business strategy

The metal container industry has been very profitable throughout the years. In 1989 the metal container industry represented 61% of all packaged goods in the US. However, the metal container industry has been on a decline in recent years because a growing number of customers are switching to plastic or glass containers. Crown's basic business strategy is to combine the best quality metal container with the most efficient production and excellent customer service. This position has enabled the company to grow tremendously throughout the years and earn a spot in the Fortune 500.

Five Forces Analysis

Because pricing in the industry is so competitive, Crown has focused on cost efficiency and keeping expenses low so that it can make a good margin while still keeping prices low. To prevent losing orders due to slow customer service, Crown has opened more small plants as opposed to a few very large ones in order to provide faster response time. Crown builds its plants close to the customer to minimize distribution costs and wait time for the customer. Under John Connelly's leadership, Crown plants bought new, faster equipment and started operating twenty four hours a day to increase manufacturing efficiency and take full advantage of the expensive equipment necessary to run a plant. In the early 1980's Crown switched over from producing only steel cans to producing only aluminum cans, which made their product lighter and didn't affect the taste of the can's contents as much. Crown purchased aluminum from suppliers such as Reynolds Metal, Alcoa, and Alcan.

Crown has to buy raw materials such as metal and corks and rent a warehouse or other facility. Crown could either choose to buy or rent machinery. The company also might contract out delivery of their finished products to a shipping company. Crown's customers include producers of food and drink products, motor oil, and other household goods. Viable substitutes for these customers include glass and plastic containers, or metal containers produced by other companies. Because most customers buy metal containers from more than one company and the products are fairly identical, if a customer is not pleased with their order or the level of service at a company they currently buy from, they can punish that company by giving them a smaller part of their order. Consequently, metal container manufacturers must maintain high quality levels, satisfactory customer service, and speedy response time if they want to remain competitive.

The main barrier to entry into the metal container industry is the cost. In order to start producing metal cans, a company must find a place to set up a factory and spend $36 to $40 million dollars on each two piece production line and the peripheral equipment needed to go with it. The fact that there are so few notable metal container producers is also prohibitive. A new firm would have to become one of the top firms in the industry or they would not have enough market share to justify remaining in the business.

Market Position

Since the 1960's Crown has chosen to produce primarily tin plated cans (beverage and aerosol) and crowns. Staying focused has allowed Crown to be very cost efficient. Crown has built plants spread out geographically to service many customers rather than build a plant to service one particular customer like most of its competitors. This cuts down the average service time by making all customers a priority. The company even keeps up to a months inventory on hand to get fast answers to customers. Crown developed a reputation for excellent, personal service and a quality product at a low price. Crown's production process is very efficient due to the company's investment in newer, faster equipment and twenty four hour plant operations. Research and development is not the highest priority at Crown. The company has chosen to enhance the existing product line rather than spend a great deal of money on innovation. While the competition is spending a great deal of money developing new products, Crown is adapting to customer needs and letting other companies "take the risks and make the mistakes." Crown, Cork, and Seal uses very little debt financing. To eliminate cash drain, Crown eliminated cash dividends in 1956 and applied the cash to repurchase of preferred stock and reinvested in the company. Crown has wisely used its old equipment in international plants where the technology is not as advanced and the equipment is not seen as outdated. By hiring local managers who understand the local market, Crown has used the international market to generate over half of its operating profits.

Crown, Cork, and Seal's current dilemma

Since the early 1990's the packaged goods industry has been trending away from the use of metal containers and focusing more on plastics. Consequently, Crown and the metal container industry as a whole faces a dilemma: should it start producing plastic and glass containers, diversify and produce other goods besides containers, or maintain the status quo? Also, if Avery stays in the traditional metal can business, should he get involved