Crown Cork & Seal | March 18
2013
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TEAM 10: Lindsay Fisher, Adam Hines, Lovro Plejic, Steven Werman, Anirud Varadraj
TEAM 10: Lindsay Fisher, Adam Hines, Lovro Plejic, Steven Werman, Anirud Varadraj

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Metal Container Industry Analysis
When judging the metal container (“MC”) industry using Porter’s Five Forces, we have concluded that the industry is not very attractive. Suppliers and buyers both wield power over MC manufacturers such as Crown Cork & Seal (“Crown”) and rivalry among existing competitors is intense. The industry has high barriers to entry and a fairly low threat of substitutes; however, these criteria do not outweigh the impacts of the other forces. As such, we believe the MC industry is not very attractive.
The buyers in the metal container industry wield a great deal of power for several reasons. Buyers of MC were consolidating and growing larger, as evidenced by the 90% reduction in the number of buyers in the 1980s. Additionally, these buyers face low switching costs and the threat of buyers integrating backwards is real, as many former and potential buyers manufacture their metal containers in-house. The buyers are also typically price sensitive as the metal container represents just under half of the total cost of a packaged beverage. When dealing with buyers with these characteristics, buyers are a strong force in the metal container production industry. As such, John Connelly, the Crown chairman, strategically positioned Crown to counter many of these forces.
Suppliers to the MC industry are primarily aluminum producers, as steel was declining in popularity due to cost and weight disadvantages. Aluminum production was highly concentrated amongst three suppliers who had been able to extract greater profit margins throughout the latter half of the 1980s (between 1985 and 1988, the net profit margin percentages of Alcan Aluminum, Alcoa and Reynolds Metals increased at a compounded annual growth rate of 179%, 61% and 132%, respectively). These producers recognized that MC manufacturers were increasingly reliant on aluminum. Further influencing this force was the threat of suppliers integrating forward and competing in the industry as Reynolds Metals had already done. Given that suppliers offered undifferentiated products, supplier power was partially mitigated by MC producers’ ability to switch between suppliers relatively easily. Overall, our opinion is that supplier power is a medium force in the industry.
The industry is also unattractive because the intensity of rivalry is strong. Products are nearly identical and fixed production costs are high so competitors look to produce and deliver products in large quantities. MC producers fiercely compete to lower production costs by investing heavily in R&D and face high exit costs given the large capital investments. As such, the intensity of rivalry is fairly strong, contributing to the unattractive nature of the industry.
The threat of substitutes is not a strong factor. Aluminum cans offer many advantages that make them attractive, including low cost, light weight, and the ability to store products for a long time.
Barriers to entry into the MC production industry are high making the threat of new entrants fairly low. Production is capital intensive and because of supply-side economies of scale, new entrants have to invest heavily in order to compete on cost. There are also incumbency advantages that increase barriers to entry as geographic proximity to price-sensitive buyers allows reduced transportation costs. Also, the industry has low margins, making new entrants less attracted to joining the market. Countering the barriers to entry are low customer switching costs and the ability for companies to move late-model PP&E to factories overseas where it can be utilized which mitigates some of the high capital investment. Overall, we believe that barriers to entry are fairly high making this force fairly low.
To recap, the industry forces that are strongest are buyer power and intensity of rivalry. The supplier power is fairly strong and the high barriers to entry make this force fairly weak. The threat of substitutes is also weak fairly weak due to aluminum’s many advantages over steel, glass and plastic.
Crown Cork & Seal’s Industry Positioning
Crown operates in an unattractive industry, and as already seen, must deal with industry forces that are primarily negative. Yet, by understanding this, Connelly has positioned Crown to compete where these industry forces are not so strong.
Because the buying power is the strongest force in the MC industry, Crown has strategically positioned itself to find customers that don’t exemplify this strong buying power. Instead of trying to compete on price which is how to win the business of the large buyers (e.g. Coca-Cola Enterprises), Crown has catered its business to meet the needs of smaller customers who are willing to pay for service and flexibility.
In figuring out where to take Crown, Connelly recognized that one trend putting pressure on prices was the ability of suppliers to forward integrate and buyers to backward integrate. When the largest customers like Coca-Cola, PepsiCo, and Anheuser-Busch backward integrated, they were able to ensure low prices for themselves while also reducing selling opportunities for MC producers. To counter this form of buyer power, Crown chose to focus on buyers who may not have the financial resources, organizational capacity or desire to backward integrate.
Crown focused on flexibility and being able to quickly respond to customers’ needs. This was attractive to smaller customers whose demand may not be as constant and consistent as large bottlers. Crown encouraged its sales force to have close relationships with customers, which allowed them to offer customizable problem solving and technical assistance at the customer’s plant. Crown targeted customers that valued this level of service.
Crown adopted choices in its product portfolio that reflected the changing nature of the industry as well what its customers actually wanted. Crown went so far as to design equipment specifically for customers and add features that allowed rapid changeover in order to have just-in-time delivery. This helped to also work against the high rivalry in the MC industry because if Crown could capture customers who required this level of service, they would be gaining customers who are less-price sensitive and more willing to pay for this flexibility. Crown created value by being able to respond quickly to customers’ needs in ways that competitors could not.
By reducing debt levels and operating a lean organization, this allowed Crown to gain financial flexibility. This let Crown invest in plant expansions across the country to be closer to its customers, which reduced transportation costs. Their plants, unlike those of its competitors, did not serve a single customer and concentrated on providing products to a number of customers. This enabled Crown to still build economies of scale in its factories while becoming less reliant on a few large customers to keep factory utilization high. This was in fact a hedging activity, which counters the industry force that buyers face low switching costs. Furthermore, by reducing debt and freeing up cash that would otherwise be spent on interest, Crown could invest in inventory on hand which allowed the company to respond quickly to customers.
Another aspect of Crown’s approach to the MC industry forces was how it viewed R&D. Eschewing the traditional route of focusing on basic research, Crown instead opted for being a second mover in the industry. This allowed their competitors to invest in research and development and take the risks, while keeping SG&A costs low at Crown. Money spent on research at Crown went towards addressing specific requests from customers, be it more efficient plant layouts or a cap redesign. This was another way that Crown created value for its targeted customer base.
Given that buyer power was generally the strongest force in the industry, Crown positioned itself to market to customers that did not have the size to exert such power and would be willing to pay for a higher level of service. Connelly made strategic choices that served as workarounds to several forces in the industry, which led to Crown’s position in the marketplace.
Crown’s Strategy, Target Customers, and Value

Crown’s strategy is to focus on its customer service and emphasize the quality of its offerings, the flexibility of its operations, and the quick response capability in how it responds to the needs of its customers. Further, Crown’s strategy is to focus on smaller customers who care about customer service and demand tailored solutions to their problems rather than the larger ones.
By providing tailored products and solutions to smaller customers who need fast and flexible service, Crown is positioning itself differently from its competitors. In comparison to other can producers, Crown has chosen to not to do long runs for the biggest customers in the industry. This reinforces their ability to respond quickly to the requests that come from smaller customers. These activities are unique in the industry, and consequently allow Crown to capture the value created.
Crown has had to make a tradeoff in carrying out this strategy. They have decided to not focus their attention on the big customers who require long runs, massive volumes of cans, and care heavily about price. These customers offer the advantage of more consistent demand which is beneficial for production planning and cost reduction. Rather, by targeting the smaller customers, Crown does not have to compete strictly on price and can charge a premium for tailored products delivered in a timely manner. Yet, Crown has still been able to provide some service to the largest customers through their operational excellence. This allowed them to offer prices comparable to those offered by the larger can producers. The value capture from this tradeoff has been borne out in their bottom line. Their financial returns have bucked the industry trend as they are the only one of the biggest players whose return on average assets has either increased or stayed the same for the seven year period from 1982 to 1988.
Finally, Crown’s ability to not just create value but capture it is shown by how its strategy has created a fit among its activities. This is seen on several levels but most clearly in the company’s focus on the customer. While their manufacturing emphasized flexibility and a quick response to the needs of the customer, Crown took customer service one step further by offering assistance and specific problem solving at the plant of the customer. These activities created strong and lasting relationships with their customers.
Crown creates value by offering superior service and is able to capture this value by increasing cash flows through low debt service costs and lean operations. For most, the industry is unattractive because buyers wield such great power and rivalry among existing competitors is high. However, Crown has strategically positioned itself in a niche where these forces are not as strong as they are in the overall industry, thus allowing it to capture the value it creates.

Appendix Crown Cork & Seal: Metal Container Industry Analysis | | Barriers to Entry | Buyer Power | Supplier Power | Substitute Products | Intensity of Rivalry | Price | + | Low profit margin | - | Undifferentiated Product | + | Undifferentiated Product | + | Alternatives cannot easily compete with aluminum on cost, weight and shelf life | - | Concentrated competition | | - | Customer switching costs are low | - | Excess beverage can capacity | - | Supplier can integrate forward | | | - | Diversification from core industry | | | | - | Consolidation of bottlers purchasing in large volumes | | | | | - | Undifferentiated Product | | | | - | Buyers face low switching costs | | | | | | | | | | - | Can represents 45% of total cost of packaged beverage, making buyer price sensitive | | | | | | | Cost | - | Geographic location of plant, unequal access to distribution channels | - | High expectations on service and delivery | - | Concentrated Producers | | | - | Exit barriers are high | | - | Capital intensive | | | | | | | | | | - | Supply-side economies of scale exist | | | | | | | | | | + | Increasing raw material and labor costs | | | | | | | | | | + | Ability to shift obsolete equipment to operations overseas | | | | | | | | | Quantity | - | Geographically limited market size (domestic vs international) | - | Buyer can integrate backward | | | - | Plastic | | | | | | | | | | - | Glass | | |