crown cork 1989_793035

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S T E P H E N P . BRADLEY

CrownCork&Sealin1989JohnF.Connelly,CrownCork&Sealsailingoctogenarianchairman,steppeddownand appointedhislongtimedisciple,WilliamJ.Avery,chiefexecutiveofficerofthePhiladelphiacan manufacturerinMay1989.AveryhadbeenpresidentofCrownCork&Sealsince1981,buthad spentthedurationofhiscareerinConnellysshadow.AsCrownsnewCEO,Averyplannedto reviewConnellyslongfollowedstrategyinlightofthechangingindustryoutlook. ThemetalcontainerindustryhadchangedconsiderablysinceConnellytookoverCrownsreinsin 1957.AmericanNationalhadjustbeenacquiredbyFrancesstateownedPechineyInternational, makingittheworldslargestbeveragecanproducer.ContinentalCan,anotherlongstandingrival, wasnowownedbyPeterKiewitSons,aprivatelyheldconstructionfirm. In1989,all,orpartof Continentalscanmakingoperations,appearedtobeforsale.ReynoldsMetals,atraditionalsupplier ofaluminumtocanmakers,wasnowalsoaformidablecompetitorincans. Themovesbyboth suppliersandcustomersofcanmakerstointegrateintocanmanufacturingthemselveshad profoundlyredefinedthemetalcanindustrysinceJohnConnellysarrival. Reflectingonthesedramaticchanges,AverywonderedwhetherCrown,with$1.8billioninsales, shouldconsiderbiddingforallorpartofContinentalCan. AveryalsowonderedwhetherCrown shouldbreakwithtraditionandexpanditsproductlinebeyondthemanufactureofmetalcansand closures.For30yearsCrownhadstucktoitscorebusiness,metalcanmaking,butanalystssawlittle growthpotentialformetalcansinthe1990s.Industryobserversforecastplasticsasthegrowth segmentforcontainers.AsAverymulledoverhisoptions,heasked:Wasitfinallytimeforachange?

TheMetalContainerIndustryThemetalcontainerindustry,representing61%ofallpackagedproductsintheUnitedStatesin 1989,producedmetalcans,crowns(bottlecaps),andclosures(screwcaps,bottlelids)toholdorseal analmostendlessvarietyofconsumerandindustrialgoods.Glassandplasticcontainerssplitthe balanceofthecontainermarketwithsharesof21%and18%,respectively.Metalcansservedthe beverage,food,andgeneralpackagingindustries. Metalcansweremadeofaluminum,steel,oracombinationofboth.Threepiececanswere formedbyrollingasheetofmetal,solderingit,cuttingittosize,andattachingtwoends,thereby creatingathreepiece,seamedcan.Steelwastheprimaryrawmaterialofthreepiececans,which

________________________________________________________________________________________________________________ProfessorStephenP.BradleyandResearchAssociateSheilaM.Cavanaughpreparedthiscase.HBScasesaredevelopedsolelyasthebasisfor classdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffective management. Copyright1993PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call18005457685, writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgotohttp://www.hbsp.harvard.edu.Nopartofthispublicationmaybe reproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeanselectronic,mechanical, photocopying,recording,orotherwisewithoutthepermissionofHarvardBusinessSchool.

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

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CrownCork&Sealin1989

weremostpopularinthefoodandgeneralpackagingindustries.Twopiececans,developedinthe 1960s,wereformedbypushingaflatblankofmetalintoadeepcup,eliminatingaseparatebottom,a moldingprocesstermeddrawnandironed.Whilealuminumcompaniesdevelopedtheoriginal technologyforthetwopiececan,steelcompaniesultimatelyfollowedsuitwithathinwalledsteel version.By1983,twopiececansdominatedthebeverageindustrywheretheywerethecanofchoice forbeerandsoftdrinkmakers.Ofthe120billioncansproducedin1989,80%weretwopiececans. Throughoutthedecadeofthe1980s,thenumberofmetalcansshippedgrewbyanannual averageof3.7%.Aluminumcangrowthaveraged8%annually,whilesteelcanshipmentsfellbyan averageof3.1%peryear.Thenumberofaluminumcansproducedincreasedbyalmost200%during theperiod19801989,reachingahighof85billion,whilesteelcanproductiondroppedby22%to35 billionforthesameperiod(seeExhibit1).

IndustryStructureFivefirmsdominatedthe$12.2billionU.S.metalcanindustryin1989,withanaggregate61% marketshare.ThecountryslargestmanufacturerAmericanNationalCanhelda25%market share.ThefourfirmstrailingAmericanNationalinsaleswereContinentalCan(18%marketshare), ReynoldsMetals(7%),CrownCork&Seal(7%),andBallCorporation(4%).Approximately100firms servedthebalanceofthemarket.

Pricing Pricinginthecanindustrywasverycompetitive.Tolowercosts,managerssought longrunsofstandarditems,whichincreasedcapacityutilizationandreducedtheneedforcostly changeovers. Asaresult,mostcompaniesofferedvolumediscountstoencouragelargeorders. Despitepersistentmetalcandemand,industryoperatingmarginsfellapproximately7%toroughly 4%between1986and1989.Industryanalystsattributedthedropinoperatingmarginsto(1)a15% increaseinaluminumcansheetpricesatatimewhenmostcanmakershadguaranteedvolume pricesthatdidnotincorporatesubstantialcostincreases;(2)a7%increaseinbeveragecanproduction capacitybetween1987and1989;(3)anincreasingnumberofthenationsmajorbrewersproducing containersinhouse;and(4)theconsolidationofsoftdrinkbottlersthroughoutthedecade.Forcedto economizefollowingcostlybattlesformarketshare,softdrinkbottlersusedtheirleveragetoobtain packagingpricediscounts. 1 Overcapacityandashrinkingcustomerbasecontributedtoan unprecedentedsqueezeonmanufacturersmargins,andthecanmanufacturersthemselves contributedtothemargindeteriorationbyaggressivelydiscountingtoprotectmarketshare.Asone manufacturerconfessed,Whenyoulookatthebeveragecanindustry,itsnosecretthatweare sellingatalowerpricetodaythanwewere10yearsago. Customers AmongtheindustryslargestusersweretheCocaColaCompany,AnheuserBusch Companies,Inc.,PepsicoInc.,andCocaColaEnterprisesInc.(seeExhibit2).Consolidationwithin thesoftdrinksegmentofthebottlingindustryreducedthenumberofbottlersfromapproximately 8,000in1980toabout800in1989andplacedasignificantamountofbeveragevolumeinthehandsof afewlargecompanies. 2 Sincethecanconstitutedabout45%ofthetotalcostofapackagedbeverage, softdrinkbottlersandbrewersusuallymaintainedrelationshipswithmorethanonecansupplier. Poorserviceanduncompetitivepricescouldbepunishedbycutsinordersize.Duetothebulkynatureofcans,manufacturerslocatedtheirplantscloseto Distributio customerstominimizetransportationcosts.Theprimarycostcomponentsofthemetalcaninclude n1SalomonBrothers,BeverageCansIndustryReport,March1,1990. 2T.Davis,"CanDo:AMetalContainerUpdate,"BeverageWorld(June1990):34.

2 Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.


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(1)rawmaterialsat65%;(2)directlaborat12%;and(3)transportationatroughly7.5%.Various estimatesplacedtheradiusofeconomicaldistributionforaplantatbetween150and300miles. Beveragecanproducerspreferredaluminumtosteelbecauseofaluminumslighterweightandlower 3 shippingcosts. In1988,steelcansweighedmorethantwiceasmuchasaluminum. Thecosts incurredintransportingcanstooverseasmarketsmadeinternationaltradeuneconomical.Foreign marketswereservedbyjointventures,foreignsubsidiaries,affiliatesofU.S.canmanufacturers,and localoverseasfirms.

Manufacturing Twopiececanlinescostapproximately$16million,andtheinvestmentin peripheralequipmentraisedtheperlinecostto$20$25million.Theminimumefficientplantsize wasonelineandinstallationsrangedfromonetofivelines.Whiletwopiececanlinesachieved quickandpersistentpopularity,theydidnotcompletelyreplacetheirantecedentsthethreepiece canlines.Thefoodandgeneralpackagingsegmentrepresenting28%ofthemetalcontainer industryin1989continuedusingthreepiececansthroughoutthe1980s.Thebeveragesegment, however,hadmadeacompleteswitchfromthreepiecetotwopiececansby1983.Atypicalthreepiececanproductionlinecostbetween$1.5and$2millionandrequiredexpensive seaming,endmaking,andfinishingequipment.Sinceeachfinishinglinecouldhandletheoutputof threeorfourcanforminglines,theminimumefficientplantrequiredatleast$7millioninbasic equipment.Mostplantshad12to15linesfortheincreasedflexibilityofhandlingmorethanonetype ofcanatonce.However,anymorethan15linesbecameunwieldybecauseoftheneedfor duplicationofsetupcrews,maintenance,andsupervision. Thebeverageindustrysswitchfrom threetotwopiecelinespromptedmanymanufacturerstosellcomplete,fullyoperationalthreepiece linesasisfor$175,000to$200,000.Somefirmsshippedtheiroldlinesoverseastotheirforeign operationswheregrowthpotentialwasgreat,therewerefewentrenchedfirms,andcanning technologywasnotwellunderstood.

Suppliers Sincetheinventionofthealuminumcanin1958,steelhadfoughtalosingbattle againstaluminum.In1970,steelaccountedfor88%ofmetalcans,butby1989haddroppedto29%. Inadditiontobeinglighter,ofhigher,moreconsistentquality,andmoreeconomicaltorecycle, aluminumwasalsofriendliertothetasteandofferedsuperiorlithographyqualities.By1989, aluminumaccountedfor99%ofthebeerand94%ofthesoftdrinkmetalcontainerbusinesses, respectively.Thecountrysthreelargestaluminumproducerssuppliedthemetalcanindustry.Alcoa,the worldslargestaluminumproducerwith1988salesof$9.8billion,andAlcan,theworldslargest marketerofprimaryaluminum,with1988salesof$8.5billion,suppliedover65%ofthedomesticcan sheetrequirements.ReynoldsMetals,thesecondlargestaluminumproducerintheUnitedStates, with1988salesof$5.6billion,suppliedaluminumsheettotheindustryandalsoproducedabout11 billioncansitself. 4 ReynoldsMetalswastheonlyaluminumcompanyintheUnitedStatesthat producedcans(seeExhibit3). Steelsconsistentadvantageoveraluminumwasprice.AccordingtoTheAmericanIronandSteel Institutein1988,steelrepresentedasavingsoffrom$5to$7foreverythousandcansproduced,oran estimatedsavingsof$500millionayearforcanmanufacturers.In1988,aluminumpricesincreased

3J.J.Sheehan,"NothingSucceedsLikeSuccess,"BeverageWorld(November1988):82. 4Until1985,aluminumcanswererestrictedtocarbonatedbeveragesbecauseitwasthecarbonationthatpreventedthecan

fromcollapsing.Reynoldsdiscoveredthatbyaddingliquidnitrogentothecan'scontents,aluminumcontainerscouldhold noncarbonatedbeveragesandstillretaintheirshape.TheliquidnitrogenmadeitpossibleforReynoldstomakecans liquor,chocolatedrinks,andfruitjuices. for


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anestimated15%,whilethelowersteelpricesincreasedbyonly5%to7%.Accordingtoa representativeofAlcoa,thedecisiononbehalfofthefirmtolimitaluminumpriceincreaseswas attributedtothethreatofpossibleinroadsbysteel.5

IndustryTrendsThemajortrendscharacterizingthemetalcontainerindustryduringthe1980sincluded(1)the continuingthreatofinhousemanufacture;(2)theemergenceofplasticsasaviablepackaging material;(3)steadycompetitionfromglassasasubstituteforaluminuminthebeermarket;(4)the emergenceofthesoftdrinkindustryasthelargestenduserofpackaging,withaluminumasthe primarybeneficiary;and(5)thediversificationof,andconsolidationamong,packagingproducers.

Inhousemanufacture Productionofcansatcaptiveplantsthoseproducingcansfortheir owncompanyuseaccountedforapproximately25%ofthetotalcanoutputin1989.Muchofthe expansionininhousemanufacturedcans,whichpersistedthroughoutthe1980s,occurredatplants ownedbythenationsmajorfoodproducersandbrewers.Manylargebrewersmovedtoholdcan costsdownbydevelopingtheirownmanufacturingcapability.Brewersfounditadvantageousto investincaptivemanufacturebecauseofhighvolume,singlelabelproductionruns.AdolphCoors tookthistotheextremebyproducingalltheircansinhouseandsupplyingalmostalloftheirown aluminumrequirementsfromtheir130millionpoundsheetrollingmillinSanAntonio,Texas. 6 By theendofthe1980s,thebeerindustryhadthecapacitytosupplyabout55%ofitsbeveragecan needs.7Captivemanufacturingwasnotwidespreadinthesoftdrinkindustry,wheremanysmallbottlers andfranchiseoperationsweregenerallymoredispersedgeographicallycomparedwiththebrewing industry.Softdrinkbottlerswerealsogearedtolowvolume,multilabeloutput,whichwasnotas economicallysuitablefortheinhousecanmanufacturingprocess.

Plastics Throughoutthe1980s,plasticswasthegrowthleaderinthecontainerindustrywithits sharegrowingfrom9%in1980to18%in1989.PlasticbottlesalesintheUnitedStateswere estimatedtoreach$3.5billionin1989,withfoodandbeveragebuoyedbysoftdrinkssales accountingfor50%ofthetotal.Plasticbottlesaccountedfor11%ofdomesticsoftdrinksales,with mostofitspenetrationcomingattheexpenseofglass.Plasticslightweightandconvenienthandling contributedtowidespreadconsumeracceptance.Thegreatestchallengefacingplastics,however, wastheneedtoproduceamaterialthatsimultaneouslyretainedcarbonationandprevented infiltrationofoxygen.Theplasticbottleoftenallowedcarbonationtoescapeinlessthan4months, whilealuminumcansheldcarbonationformorethan16months.AnheuserBuschclaimedthatU.S. brewersexpectedbeercontainerstohaveatleasta90dayshelflife,arequirementthathadnotbeen metbyanyplasticcanorbottle. 8 Additionally,standardproductionlinesthatfilled2,400beercans perminuterequiredcontainerswithperfectlyflatbottoms,afeaturedifficulttoachieveusing plastic.9 Since1987,thegrowthofplasticsslowedsomewhatapparentlyduetotheimpactonthe

5L.Sly,"A`CanDoCrusade'BySteelIndustry,"TheChicagoTribune(July3,1988):1. 6MerrillLynchCapitalMarketsContainersandPackagingIndustryReport,March21,1991. 7SalomonBrothersInc.Containers/Packaging:BeverageCansIndustryReport,April3,1991. 8A. Agoos,"AluminumGirdsForThePlasticCanBid,"ChemicalWeek(January16,1985):18. 9B.Oman,"AClearChoice?"BeverageWorld(June1990):78.



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environmentofplasticpackaging.Unlikeglassandaluminum,plasticsrecyclingwasnotaclosed loopsystem.10 Thereweremanysmallplayersproducingplasticcontainersin1988,oftenspecializingbyenduse orgeographicregion.However,onlysevencompanieshadsalesofover$100million.Owens Illinois,thelargestproducerofplasticcontainers,specializedincustommadebottlesandclosuresfor food,healthandbeauty,andpharmaceuticalproducts.Itwastheleadingsupplierofprescription containers,soldprimarilytodrugwholesalers,majordrugchains,andthegovernment.Constar,the secondlargestdomesticproducerofplasticcontainers,acquireditsplasticbottleoperationfrom OwensIllinois,andreliedonplasticsoftdrinkbottlesforabouttwothirdsofitssales.Johnson Controlsproducedbottlesforthesoftdrinkindustryfrom17U.S.plantsandsixnonU.S.plants,and wasthelargestproducerofplasticbottlesforwaterandliquor.AmericanNationalandContinental Canbothproducedplasticbottlesforfood,beverages,andotherproductssuchastennisballs(see Exhibit4forinformationoncompetitors).

Glass Glassbottlesaccountedforonly14%ofdomesticsoftdrinksales,trailingmetalcansat 75%.Thecostadvantagethatglassoncehadrelativetoplasticinthepopular16ouncebottlesize disappearedbythemid1980sbecauseofconsistentlydecliningresinprices.Moreover,softdrink bottlerspreferredthemetalcantoglassbecauseofavarietyoflogisticalandeconomicbenefits:faster fillingspeeds,lighterweight,compactnessforinventory,andtransportationefficiency.In1989,the deliveredcost(includingclosureandlabel)ofa12ouncecan(themostpopularsize)wasabout15% lessthanthatofglassorplastic16ouncebottles(themostpopularsize). 11 Theareainwhichglass continuedtooutperformmetal,however,wasthebeercategorywhereconsumersseemedtohavea loveaffairwiththelongneckbottlethatwouldworktoitsadvantageinthecomingyears.12Throughoutthe1980s,thesoftdrinkindustryemergedas Softdrinksandaluminum thelargestenduserofpackaging.In1989,softdrinkscapturedmorethan50%ofthetotalbeverage cans market.Thesoftdrinkindustryaccountedfor42%ofmetalcansshippedin1989upfrom29%in 1980.Themajorbeneficiaryofthistrendwasthealuminumcan.Inadditiontotheindustrys continuedcommitmenttoadvancedtechnologyandinnovation,aluminumspenetrationcouldbe tracedtoseveralfactors:(1)aluminumsweightadvantageoverglassandsteel;(2)aluminumsease ofhandling;(3)awidervarietyofgraphicsoptionsprovidedbymultipackcancontainers;and(4) consumerpreference. 13 Aluminumsgrowthwasalsosupportedbythevendingmachinemarket, whichwasbuiltaroundcansanddispensedapproximately20%ofallsoftdrinksin1989.An estimated60%ofCocaColasand50%ofPepsisbeverageswerepackagedinmetalcans.CocaCola EnterprisesandPepsiColaBottlingGrouptogetheraccountedfor22%ofallsoftdrinkcansshipped in1989. 14 In1980,theindustryshipped15.9billionaluminumsoftdrinkcans.By1989,thatfigure hadincreasedto49.2billioncans.Thisincrease,representinga12%averageannualgrowthrate,was achievedduringadecadethatexperienceda3.6%averageannualincreaseintotalgallonsofsoft drinksconsumed.10Inresponsetopublicconcern,thecontainerindustrydevelopedhighlyefficient"closedloop"recyclingsystems.

flowedfromthemanufacturer,throughthewholesaler/distributor,totheretailer,totheconsumer,andbacktothe Containers manufacturerormaterialsupplierforrecycling.Aluminum'shighrecyclingvaluepermittedcanmanufacturerstosellcansat alowercosttobeverageproducers.Thereclamationofsteelcanslaggedthatofaluminumbecausecollectionandrecycling didnotresultinsignificantenergyormaterialcostadvantages.11N.Lang,"ATouchofGlass,"BeverageWorld(June1990):36. 12Lang,"ATouchofGlass." 13U.S.IndustrialOutlook,19841990. 14TheFirstBostonCorporation,PackagingIndustryReport,April4,1990.


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Lowprofitmargins,excesscapacity,andrisingmaterial Diversificationand andlaborcostspromptedanumberofcorporatediversificationsandsubsequentconsolidations consolidation throughoutthe1970sand1980s.Whilemanycanmanufacturersdiversifiedacrossthespectrumof rigidcontainerstosupplyallmajorendusemarkets(food,beverages,andgeneralpackaging),others diversifiedintononpackagingbusinessessuchasenergy(oilandgas)andfinancialservices. Overa20yearperiod,forexample,AmericanCanreduceditsdependenceondomesticcan manufacturing,movingintototallyunrelatedfields,suchasinsurance.Between1981and1986the companyinvested$940milliontoacquireallorpartofsixinsurancecompanies.Ultimately,the packagingbusinessesofAmericanCanwereacquiredbyTriangleIndustriesin1986,withthe financialservicesbusinessesreemergedasPrimerica.Similarly,ContinentalCanbroadlydiversified itsholdings,changingitsnametoContinentalGroupin1976whencansalesdroppedto38%oftotal sales.Inthe1980s,ContinentalGroupinvestedheavilyinenergyexploration,researchand transportation,butprofitswereweakandtheywereultimatelytakenoverbyPeterKiewitSonsin 1984. WhileNationalCanstuckbroadlytocontainers,itdiversifiedthroughacquisitionintoglass containers,foodcanning,petfoods,bottleclosures,andplasticcontainers.However,insteadof generatingfuturegrowthopportunities,theexpansionintofoodproductsprovedadragoncompany earnings. UndertheleadershipofJohnW.Fisher,BallCorporation,aleadingglassbottleandcanmaker, expandedintothehightechnologymarketandby1987hadprocured$180millionindefense contracts.FisherdirectedBallintosuchfieldsaspetroleumengineeringequipment,photoengraving andplastics,andestablishedthecompanyasaleadingmanufacturerofcomputercomponents.

MajorCompetitorsin1989Forover30years,threeofthecurrentfivetopcompetitorsincanmanufacturingdominatedthe metalcanindustry.Sincetheearly1950s,AmericanCan,ContinentalCan,CrownCork&Seal,and NationalCanheldthetopfourrankingsincanmanufacturing. Aseriesofdramaticmergersand acquisitionsamongseveralofthecountrysleadingmanufacturersthroughoutthe1980sservedto shiftaswellasconsolidatepoweratthetop.ManagementatfourthrankedCrownCork&Seal viewedthefollowingfourfirmsasconstitutingitsprimarycompetitionin1989:AmericanNational Can,ContinentalCan,ReynoldsMetals,andBallCorporation.TwosmallercompaniesVanDorn CompanyandHeekinCanwerestrongcompetitorsregionally(seeExhibit5). Representingthemergeroftwo former,longestablished AmericanNationalCan competitors,AmericanNationalawhollyownedsubsidiaryofthePechineyInternationalGroup generatedsalesrevenuesof$4.4billionin1988.In1985,TriangleIndustries,aNewJerseybased makerofvideogames,vendingmachinesandjukeboxes,boughtNationalCanfor$421million.In 1986,TriangleboughttheU.S.packagingbusinessesofAmericanCanfor$550million.In1988, TrianglesoldAmericanNationalCan(ANC)toPechiney,S.A.,theFrenchstateownedindustrial concern,for$3.5billion.Pechineywastheworldsthirdlargestproducerofaluminumand,through itsCebalGroup,amajorEuropeanmanufacturerofpackaging.AmemberofthePechiney InternationalGroup,ANCwasthelargestbeveragecanmakerintheworldproducingmorethan 30billioncansannually. Withmorethan100facilitiesin12countries,ANCsproductlineof aluminumandsteelcans,glasscontainersandcapsandclosures,servedthemajorbeverage,food, pharmaceuticals,andcosmeticsmarkets.



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ContinentalCan ContinentalCanhadlongbeenafinanciallystablecontainercompany;its revenuesincreasedeveryyearwithoutinterruptionfrom1923throughthemid1980s.Bythe1970s, ContinentalhadsurpassedAmericanCanasthelargestcontainercompanyintheUnitedStates.The year1984,however,representedaturningpointinContinentalshistorywhenthecompanybecame anattractivetakeovertarget.PeterKiewitSonsInc.,aprivateconstructionfirminOmaha,Nebraska, purchasedContinentalGroupfor$2.75billionin1984.UnderthedirectionofViceChairmanDonald Strum,KiewitdismantledContinentalGroupinanefforttomaketheoperationmoreprofitable. Withinayear,Strumhadsold$1.6billionworthofinsurance,gaspipelinesandoilandgasreserves. StaffatContinentalsConnecticutheadquarterswasreducedfrom500to40.ContinentalCan generatedsalesrevenuesof$3.3billionin1988,rankingitsecondbehindAmericanNational.Bythe late1980s,managementatKiewitconsidereddivestinginwholeorinpartContinentalCans packagingoperations,whichincludedContinentalCanUSA,Europe,andCanada,aswellasmetal packagingoperationsinLatinAmerica,Asia,andtheMiddleEast. ReynoldsMetals BasedinRichmond,Virginia,ReynoldsMetalswastheonlydomestic companyintegratedfromaluminumingotthroughaluminumcans.With1988salesrevenuesof$5.6 billionandnetincomeof$482million,Reynoldsservedthefollowingprincipalmarkets:packaging andcontainers;distributorsandfabricators;buildingandconstruction;aircraftandautomotive;and electrical.Reynoldspackagingandcontainerrevenueamountedto$2.4billionin1988.Asoneof theindustrysleadingcanmakers,Reynoldswasinstrumentalinestablishingnewusesforthe aluminumcanandwasaworldleaderincanmakingtechnology.Reynoldsdevelopmentsincluded highspeedcanformingmachinerywithcapabilitiesinexcessof400cansperminute,faster inspectionequipment(operatingatspeedsofupto2,000cansperminute),andspunaluminumtops whichcontainedlessmaterial.Thecompanysnextgenerationofcanendmakingtechnologywas scheduledforinstallationintheearly1990s.Foundedin1880inMuncie,Indiana,BallCorporationgeneratedoperating Ball incomeof$113milliononsalesrevenuesof$1billionin1988.Consideredoneoftheindustryslow Corporation costproducers,Ballwasthefifthlargestmanufacturerofmetalcontainersaswellasthethirdlargest glasscontainermanufacturerintheUnitedStates.Ballspackagingbusinessesaccountedfor82.5%of totalsalesand77.6%ofconsolidatedoperatingearningsin1988.Ballscanmakingtechnologyand manufacturingflexibilityallowedthecompanytomakeshorterrunsintheproductionofcustomized, highermarginproductsdesignedtomeetcustomersspecificationsandneeds.In1988,beveragecan salesaccountedfor62%oftotalsales.AnheuserBusch,Ballslargestcustomer,accountedfor14%of salesthatyear.In1989,Ballwasrumoredtobeplanningtopurchasethebalanceofits50%owned jointventure,BallPackagingProductsCanada,Inc.TheacquisitionwouldmakeBallthenumber twoproducerofmetalbeverageandfoodcontainersintheCanadianmarket. Theindustrysnexttwolargestcompetitors,withacombinedmarket VanDorn shareof3%,wereVanDornCompanyandHeekinCan,Inc.Foundedin1872inCleveland,Ohio, Company VanDornmanufacturedtwoproductlines:containersandplasticinjectionmoldingequipment.Van Dornwasoneoftheworldslargestproducersofdrawnaluminumcontainersforprocessedfoods, andamajormanufacturerofmetal,plasticandcompositecontainersforthepaint,petroleum, chemical,automotive,food,andpharmaceuticalindustries.VanDornwasalsoaleading manufacturerofinjectionmoldingequipmentfortheplasticsindustry.ThecompanysDaviesCan Division,foundedin1922,wasaregionalmanufacturerofmetalandplasticcontainers.In1988, Daviesplannedtobuildtwonewcanmanufacturingplantsatacostofabout$20millioneach.These facilitieswouldeachproduceabout40millioncansannually.VanDornsconsolidatedcansalesof $334millionin1988rankeditsixthoverallamongthecountrysleadingcanmanufacturers.


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HeekinCan JamesHeekin,aCincinnaticoffeemerchant,foundedHeekinCanin1901asa waytopackagehisownproducts.Thecompanyexperiencedrapidgrowthandsooncontainedone ofthecountryslargestmetallithographyplantsunderoneroof.ThreegenerationsoftheHeekin familybuiltHeekinintoastrongregionalforceinthepackagingindustry.Thefamilysoldthe businesstoDiamondInternationalCorporation,alarge,diversifiedpubliclyheldcompany,in1965. DiamondoperatedHeekinasasubsidiaryuntil1982whenitwassoldtoitsoperatingmanagement andagroupofprivateinvestors.Heekinwentpublicin1985.With1988salesrevenuesof$275.8 million,seventhrankedHeekinprimarilymanufacturedsteelcansforprocessors,packagers,and distributorsoffoodandpetfood.Heekinrepresentedthecountryslargestregionalcanmaker.

CrownCork&SealCompanyCompanyHistoryInAugust1891,aforemaninaBaltimoremachineshophituponanideaforabetterbottlecapa pieceoftincoatedsteelwithaflangededgeandaninsertofnaturalcork.Soonthiscrowncorkcap becamethehitproductofanewventure,CrownCork&SealCompany.Whenthepatentsranout, however,competitionbecamesevereandnearlybankruptedthecompanyinthe1920s.Thefaltering Crownwasboughtin1927byacompetitor,CharlesMcManus.15 UnderthepaternalisticleadershipofMcManus,Crownprosperedinthe1930s,sellingmorethan halfoftheUnitedStatesandworldsupplyofbottlecaps.Hethencorrectlyanticipatedthesuccessof thebeercananddiversifiedintocanmaking,buildingoneoftheworldslargestplantsin Philadelphia.However,atonemillionsquarefeetandcontainingasmanyas52lines,itwasa nightmareofinefficiencyandexperiencedsubstantiallosses.AlthoughMcManuswasanenergetic leader,heengagedinnepotismandneverdevelopedanorganizationthatcouldrunwithouthim. Followinghisdeathin1946,thecompanyranonmomentum,maintainingdividendsattheexpense ofinvestmentinnewplants.Followingadisastrousattempttoexpandintoplasticsandaludicrous diversificationintometalbirdcages,Crownreorganizedalongthelinesofthemuchlarger ContinentalCan,incurringadditionalpersonnelandexpensethatagainbroughtthecompanynearto bankruptcy. Atthetime,JohnConnelly,apaperboxfactoryworkersincetheage15,hadbecomeeasternsales manageroftheContainerCorporationofAmerica.Whenhefoundedhisowncompany,Connelly Containers,Inc.,in1946,Crownpromisedhimsomebusiness.Thatpromisewasforgottenbythe postMcManusregime,whichloftilyrefusedtotakeachanceonasmallsupplierlikeConnelly.By 1955,whenCrownsdistressbecameevident,ConnellybeganbuyingstockandinNovember1956 wasaskedtobeanoutsidedirectoradesperatemovebytheailingcompany.16 InApril1957,CrownCork&Sealteeteredonthevergeofbankruptcy.BankersTrustCompany withdrewCrownslineofcredit;itseemedthatallthatwasleftwastowritethecompanysobituary whenJohnConnellytookoverthepresidency.Hisrescueplanwassimpleashecalledit,just commonsense.Connellysfirstmovewastoparedowntheorganization,wherebyhequickly reducedheadquartersstaffbyhalftoreachaleanforceof80.Abandoningitspaternalisticculturehe returnedthecompanytoasimplefunctionalorganization.InlessthantwoyearsCrownhad

15R.J.Whalen,"TheUnoriginalIdeasThatRebuiltCrownCork,"Fortune,October1962. 16R.J.Whalen,"TheUnoriginalIdeasThatRebuiltCrown

Cork."



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reduceditspayrollby24%andeliminated1,647jobs.Aspartofthecompanysreorganization, Connellydiscardeddivisionalaccountingpractices;atthesametimeheeliminatedthedivisionalline andstaffconcept.Exceptforoneaccountantmaintainedateachplantlocation,allaccountingand costcontrolwasperformedatthecorporatelevel;thecorporateaccountingstaffoccupiedonehalf thespaceusedbytheheadquartersgroup.Inaddition,ConnellydisbandedCrownscentralresearch anddevelopmentfacility. Thesecondstepwastoinstitutetheconceptofaccountability.Connellyaimedtoinstilladeep rootedprideofworkmanshipthroughoutthecompanybyestablishingCrownmanagersasowner operatorsoftheirindividualbusinesses.Connellygaveeachplantmanagerresponsibilityforplant profitability,includinganyallocatedcosts.(Allcompanyoverhead,estimatedat5%ofsales,was allocatedtotheplantlevel.)Previously,plantmanagershadbeenresponsibleonlyforcontrollable expensesattheplantlevel.Althoughtheplantmanagerscompensationwasnottiedtoprofit performance,oneseniorexecutivepointedoutthatthemanagerswerecertainlyrewardedonthe basisofthatfigure.Connellyalsoheldplantmanagersresponsibleforqualityandcustomerservice. Connellynextfocusedonthecompanysdebtconcerns.BymidJulyCrownhadpaidoffthe banks,mainlythroughinventoryreductionandliquidation,nettingthecompany$47million. Connellyalsointroducedsalesforecastingdovetailedwithnewproductionandinventorycontrols. Thismoveputpressureontheplantmanagers,whowerenolongerabletoavoidlayoffsbydumping excessproductsintoinventory. Bytheendof1957,Crownhad,inoneobserverswords,climbedoutofthecoffinandwas sprinting. Between1956and1961,salesincreasedfrom$115millionto$176millionandprofits soared.Throughoutthe1960s,thecompanyaveragedanannual15.5%increaseinsalesand14%in profits.Connelly,notsatisfiedsimplywithshorttermreorganizationsoftheexistingcompany, developedastrategythatwouldbecomeitshallmarkforthenextthreedecades.

ConnellysStrategyAccordingtoWilliamAvery,Fromhisfirstdayonthejob,Mr.Connellystructuredthecompany tobesuccessful.Hetookcontrolofcostsanddidawonderfuljobtakingusinthedirectionof becomingowneroperators.ButwhattrulyseparatedConnellyfromhiscounterparts,Avery explained,wasthatwhilehewascontinuallylookingfornewwaysofcontrollingcosts,hewas equallyhellbentonimprovingquality.Connelly,describedbyForbesasanindividualwitha scroogelikeaversiontofanfareandoverhead,emphasizedcostefficiency,quality,andcustomer serviceastheessentialingredientsforCrownsstrategyinthedecadesahead. RecognizingCrownspositionasasmallproducerinanindustry Productsandmarkets dominatedbyAmericanCanandContinentalCan,Connellysoughttodevelopaproductlinebuilt aroundCrownstraditionalstrengthsinmetalformingandfabrication.Hechosetoemphasizethe areasCrownknewbesttinplatedcansandcrownsandtoconcentrateonspecializedusesand internationalmarkets. AdramaticillustrationofConnellyscommitmenttothisstrategyoccurredintheearly1960s.In 1960,Crownheldover50%ofthemarketformotoroilcans.In1962,R.C.CanandAnaconda Aluminumjointlydevelopedfiberfoilcansformotoroil,whichwereapproximately20%lighterand 15%cheaperthanthemetalcanstheninuse.Despitethelossofsales,managementdecidedthatit hadothermoreprofitableopportunitiesandthatnewmaterials,suchasfiberfoil,providedtoogreat athreatinthemotoroilcanbusiness.Crownsmanagementdecidedtoexitfromtheoilcanmarket.9 Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

793035


Intheearly1960sConnellysingledouttwospecificapplicationsinthedomesticmarket:beverage cansandthegrowingaerosolmarket.Theseapplicationswerecalledhardtoholdbecausecans requiredspecialcharacteristicstoeithercontaintheproductunderpressureortoavoidaffecting taste.ConnellyledCrowndirectlyfromasolderedcanintothemanufactureoftwopiecesteelcans inthe1960s.Recognizingtheenormouspotentialofthesoftdrinkbusiness,Crownbegandesigning itsequipmentspecificallytomeettheneedsofsoftdrinkproducers,withinnovationssuchastwo printersinonelineandconversionprintersthat allowed forrapiddesignchangeoverto 17 accommodatejustintimedelivery. Afterproducingexclusivelysteelcansthroughthelate1970s, ConnellyspearheadedCrownsconversionfromsteeltoaluminumcansintheearly1980s. Inadditiontothespecializedproductline,Connellysstrategywasbasedontwogeographic thrusts:expandtonationaldistributionintheUnitedStatesandinvestheavilyabroad.Connelly linkeddomesticexpansiontoCrownsmanufacturingreorganization;plantswerespreadoutacross thecountrytoreducetransportationcostsandtobenearercustomers.Crownwasunusualinthatit didnotsetupplantstoserviceasinglecustomer.Instead,Crownconcentratedonproviding productsforanumberofcustomersneartheirplants.Ininternationalmarkets,Crowninvested heavilyindevelopingnations,firstwithcrownsandthenwithcansaspackagedfoodsbecamemore widelyaccepted.Metalcontainersgenerated65%ofCrowns$1.8billion1988sales,whileclosures generated30%andpackagingequipment5%.

Manufacturing WhenConnellytookoverin1957,Crownhadperhapsthemostoutmoded andinefficientproductionfacilitiesintheindustry.Dividendshadtakenprecedenceovernew investment,andoldmachinerycombinedwiththecumbersomePhiladelphiaplanthadgenerated veryhighproductionandtransportationcosts.Soonafterhegainedcontrol,Connellytookdrastic action,closingdownthePhiladelphiafacilityandinvestingheavilyinnewandgeographically dispersedplants.From1958to1963,thecompanyspentalmost$82milliononrelocationandnew facilities.From1976through1989,Crownhad26domesticplantlocationsversus9in1955.The plantsweresmall(usually2to3linesfortwopiececans)andwerelocatedclosetothecustomer ratherthantherawmaterialsource.Crownoperateditsplants24hoursadaywithunique12hour shifts.Employeeshadtwodaysonfollowedbytwodaysoffandthenthreedaysonfollowedby threedaysoff.Crownemphasizedquality,flexibility,andquickresponsetocustomerneeds.Oneofficerclaimed thatthekeytothecanindustrywasthefactthatnobodystorescansandwhencustomersneed themtheywanttheminahurryandontime....Fastanswersgetcustomers.Toaccommodate customerdemands,someofCrownsplantskeptmorethanamonthsinventoryonhand.Crown alsoinstitutedatotalqualityimprovementprocesstorefineitsmanufacturingprocessesandgain greatercontrol.AccordingtoaCrownspokesperson,Theobjectiveofthisqualityimprovement processistomakethebestpossiblecanatthelowestpossiblecost.Youlowerthecostofdoing businessnotbythewholesaleeliminationofpeople,butbyreducingmistakesinordertoimprove efficiency.Andyoudothatbymakingeverybodyinthecompanyaccountable.

Recycling In1970,CrownformedNationwideRecyclers,Inc.,asawhollyownedsubsidiary. By1989,CrownbelievedNationwidewasoneofthetopfourorfivealuminumcanrecyclersinthe country. WhileNationwidewasonlymarginallyprofitable,Crownhadinvestedinthe neighborhoodof$10millioninitsrecyclingarm. ResearchandDevelopment(R&D) Crownstechnologystrategyfocusedonenhancingthe existingproductline.Asoneexecutivenoted,Wearenottrulypioneers.Ourphilosophyisnotto17Inthemid1960s,growthindemandforsoftdrinkandbeercanswasmorethantriplethatfortraditionalfoodcans.



793035

spendagreatdealofmoneyforbasicresearch. However,wedohavetremendousskillsindie formingandmetalfabrication,andwecanmovetoadapttothecustomersneedsfasterthananyone elseintheindustry. 18 Forinstance,Crownworkedcloselywithlargebreweriesinthedevelopment ofthetwopiecedrawnandironedcansforthebeverageindustry.Crownalsomadeanexplicit decisiontostayawayfrombasicresearch.Accordingtooneexecutive,Crownwasnotinterestedin allthefrillsofanR&Dsectionofhighclass,ivorytoweredscientists....Thereisatremendous assetinherentinbeingsecond,especiallyinthefaceoftheeverchangingstateoffluxyoufindinthis industry.Youtrytoletotherstaketherisksandmakethemistakes.... ThisphilosophydidnotmeanthatCrownneverinnovated.Forinstance,Crownwasabletobeat itscompetitorsintotwopiececanproduction.Approximately$120millioninnewequipmentwas installedfrom1972through1975,andby1976Crownhad22twopiecelinesinproductionmore thananyothercompetitor. 19 Crownsresearchteamsalsoworkedcloselywithcustomersonspecific customerrequests.Forexample,astudyofthemostefficientplantlayoutforafoodpackerorthe redesignofadustcapfortheaerosolpackagerwerenotunusualprojects. ThecornerstoneofCrownsmarketingstrategywas,in JohnConnellyswords,thephilosophythatyoucantjustincreaseefficiencytosucceed;youmustat thesametimeimprovequality.InconjunctionwithitsR&Dstrategy,thecompanyssalesforce maintainedclosetieswithcustomersandemphasizedCrownsabilitytoprovidetechnicalassistance andspecificproblemsolvingatthecustomersplant.Crownsmanufacturingemphasisonflexibility andquickresponsetocustomersneedssupporteditsmarketingemphasisonputtingthecustomer first.MichaelJ.McKenna,presidentofCrownsNorthAmericanDivision,insisted,Wehavealways beenandalwayswillbeextremelycustomerdriven.20 Competingcansweremadeofidenticalmaterialstoidenticalspecificationsonpractically identicalmachinery,andsoldatalmostidenticalpricesinagivenmarket.AtCrown,allcustomers gripeswenttoJohnConnelly,whowasthecompanysbestsalesman. 21 Avisitorrecalledbeinginhis officewhenacomplaintcamethroughfromthemanagerofaFloridacitruspackingplant.Connelly assuredhimtheproblemwouldbetakencareofimmediately,thencasuallyremarkedthathewould beinFloridathenextday.Wouldtheplantmanagerjoinhimfordinner? Hewouldindeed.As Crownspresidentputthetelephonedown,hisvisitorsaidthathehadntrealizedConnellywas planningtogotoFlorida.NeitherdidI,confessedConnelly,untilIbegantalking.22 Afterhetookoverin1957,Connellyappliedthefirstreceiptsfromthesaleof Financin inventorytogetoutfromunderCrownsshorttermbankobligations.Hethensteadilyreducedthe g debt/equityratiofrom42%in1956to18.2%in1976and5%in1986.Bytheendof1988,Crowns debtrepresentedlessthan2%oftotalcapital.Connellydiscontinuedcashdividendsin1956,andin 1970repurchasedthelastofthepreferredstock,eliminatingpreferreddividendsasacashdrain. From1970forward,managementappliedexcesscashtotherepurchaseofstock. Connellyset ambitiousearningsgoalsandmostyearsheachievedthem.Inthe1976annualreporthewrote,A longtimeagowemadeapredictionthatsomedayoursaleswouldexceed$1billionandprofitsof $60.00pershare.Sincethen,thestockhasbeensplit20for1sothismeans$3.00pershare.Crown18R.G.H amermesh,M.J.Anderson,Jr.,andJ.E.Harris,"StrategiesforLowMarketShareBusiness,"HarvardBusinessReview

Marketingandcustomerservice

(MayJune1978):99.

19In1976,therewere47twopiecetinplateand130twopiecealuminumlinesintheUnitedStates. 20OneHundredYears,CrownCork&SealCompany,Inc. 21 Whalen,TheUnoriginalIdeasThatRebuiltCrownCork. 22Whalen,"TheUnoriginalIdeasThatRebuiltCrown

Cork."


793 35 4 1 0

Exhibit1

MetalCanShipmentsbyMarketandProduct,19811989(millionsofcans)1981 %1983 % 1985

CrownCork&Sealin1989 793035


%

1987

(Est.)1989 % %

C o p y i n g o r p o s t i n g i s a n i n f r i n g e m e n t o f c o p y r i g h t . P e r m i s s i o n s @ h b s p . h a r v a r d . e d u o r 6 1 7 7 8 3 7 8 6 0 .

employeeexpressedtheloyaltycreatedbyConnelly:IfJohntoldmetojumpoutthewindow,Id Cork&Sealsrevenuesreached$1billionin1977andearningspersharereached$3.46.Earningsper jumpandbesurehedcatchmeatthebottomwithastockoptioninhishand. sharereached$10.11in1988adjustedfora3for1stocksplitinSeptember1988. Despitetheemployeesloyalty,Connellywasadifficultmantoplease.Crownsemployeeshad International AsignificantdimensionofConnellysstrategyfocusedoninternationalgrowth, togetusedtoConnellystough,straightlinemanagement.FortunecreditedCrownssuccessto particularlyindevelopingcountries. Between1955and1960,Crownreceivedwhatwerecalled Connelly,whosegenialIrishgrinmasksasobersalesmanexecutivewhobelievesintheeightyhour pioneerrightsfrommanyforeigngovernmentsaimingtobuilduptheindustrialsectorsoftheir weekandintravelingwhilecompetitorssleep.Hewenttomeetingsuninvited,andexpectedthe countries.TheserightsgaveCrownfirstchanceatanynewcanorclosurebusinessintroducedinto samedevotiontoCrownofhisemployeesashedemandedofhimself.Asoneobserverremembered: thesedevelopingcountries.MarkW.Hartman,presidentofCrownsInternationalDivision, describedConnellyasaJohnnyAppleseedwithrespecttotheinternationalmarketplace.Whenthe TheSaturdaymorningmeetingisstandardoperatingprocedure.Crownsexecutivestravel newcountriesofAfricawereemerging,forexample,Johnwasthereofferingcrownmaking andconferonlyatnightandonweekends.WilliamD.Wallace,vicepresidentforoperations, capabilitiestohelpthemintheirindustrialization,whileatthesametimegettingafootholdfor travels100,000milesayear,ofteninthecompanyplane.ButConnellysetsthepace.An Crown.Johnstruelovewasinternationalbusiness. 23 By1988,Crowns62foreignplantsgenerated associaterecallsdrivingtohishomeinthepredawnblacknesstopickhimupforaflighttoa 44%ofsalesand54%ofoperatingprofits.JohnConnellyvisitedeachofCrownsoverseasplants. distantplant.TheConnellyhousewasdark,buthespottedafiguresittingonthecurbundera (SeeExhibit6formapofplantlocations.) streetlight,engrossedinalooseleafbook.Connellysgreeting,ashejumpedintothecar:I wanttotalktoyouaboutlastmonthsvariances.25 Crownemphasizednationalmanagementwhereverpossible.Localpeople,Crownasserted, understoodthelocalmarketplace:thesuppliers,thecustomers,andtheuniqueconditionsthatdrove supplyanddemand.Crownsoverseasinvestmentalsoofferedopportunitiestorecycleequipment AverysChallengein1989 thatwas,byU.S.standards,lesssophisticated.Becausecanmanufacturingwasnewtomanyregions oftheworld,Crownsolderequipmentmettheneedsofwhatwasstilladevelopingindustry Averythoughtlongandhardabouttheoptionsavailabletohimin1989.Heconsideredthe overseas. growingopportunitiesinplasticclosuresandcontainers,aswellasglasscontainers. Withgrowth slowinginmetalcontainers,plasticswastheonlycontainersegmentthatheldmuchpromise. Performance ConnellysstrategymetwithsubstantialsuccessthroughouthistenureatCrown. However,thepossibilityofdiversifyingbeyondthemanufactureofcontainersaltogetherhadsome Withstocksplitsandpriceappreciation,$100investedinCrownstockin1957wouldbeworth appeal,althoughtheappropriateopportunitywasnotathand.WhileCrownscompetitorshad approximately$30,000in1989.Afterrestructuringthecompanyinhisfirstthreeyears,revenues aggressivelyexpandedinavarietyofdirections,Connellyhadbeencautious,andhadprospered. grewat12.2%peryearwhileincomegrewat14.0%overthenexttwodecades(seeExhibit7).Return AverywonderedifnowwasthetimeforachangeatCrown. onequityaveraged15.8%formuchofthe1970s,whileContinentalCanandAmericanCanlaggedfar behindat10.3%and7.1%,respectively.Overtheperiod19681978Crownstotalreturnto Withinthetraditionalmetalcanbusiness,Averyhadtodecidewhetherornottogetinvolvedin shareholdersranked114outoftheFortune500,wellaheadofIBM(183)andXerox(374). thebiddingforContinentalCan.TheacquisitionofContinentalCanCanada(CCC)withsalesof

roughly$400millionwouldmakeCanadaCrownslargestsinglepresenceoutsideoftheUnited Intheearly1980s,flatindustrysales,combinedwithanincreasinglystrongdollaroverseas, States.ContinentalsUSAbusinesswithestimatedrevenuesof$1.3billionin1989woulddouble unrelentingpenetrationbyplastics,andovercapacityincanmanufacturingathome,ledtodeclining thesizeofCrownsdomesticoperations.ContinentalsLatinAmerican,AsianandMiddleEastern salesrevenuesatCrown.Crownssalesdroppedfrom$1.46billionin1980to$1.37billionby1984. operationswererumoredtobepricedintherangeof$100millionto$150million.Continentals However,by1985Crownhadreboundedandannualsalesgrowthaveraged7.6%from1984through Europeanoperationsgeneratedestimatedsalesof$1.5billionin1989andincludedaworkforceof 1988whileprofitgrowthaveraged12%(seeExhibits8and9).Overtheperiod19781988Crowns 10,000at30productionsites.Potentialbiddersforall,orpartofContinentalsoperations,included totalreturntoshareholderswas18.6%peryear,ranking146outoftheFortune500.In1988,Business manyofCrownsU.S.rivalsinadditiontoEuropeancompetition:PechineyInternationalofFrance, WeeknotedthatConnellyearningatotalofonly$663,000inthethreeyearsendingin1987garnered MetalBoxofGreatBritain(whichhadrecentlyacquiredCarnaudSA),andVIAGAG,aGerman shareholdersthebestreturnsfortheleastexecutivepayintheUnitedStates.Asanindustryanalyst tradinggroup,amongothers. observed,Crownsstrategyisanononsense,backtobasicsstrategyexcepttheyneverleftthe basics.24 Averyknewthatmostmergersinthisindustryhadnotworkedoutwell.Healsothoughtabout thechallengeoftakingtwocompaniesthatcomefromcompletelydifferentculturesandbringing themtogether.Therewouldbeinevitableemotionalandattitudinalchanges,particularlyfor JohnConnellysContributiontoSuccess ContinentalssalariedmanagersandCrownsowneroperators.Averyalsoknewthatthemerger ofAmericanCanandNationalCanhaditsdifficulties.Thatconsolidationwastakinglongerthan Customers,employees,competitors,andWallStreetanalysts,attributedCrownssustained expectedand,accordingtooneobserver,AmericanCanwouldbeliterallywipedoutintheend. successtotheuniqueleadershipofJohnConnelly.HearrivedatCrownasitheadedintobankruptcy in1957,achieveda1,646%increaseinprofitsonarelativelyinsignificantsalesincreaseby1961,and AveryfoundhimselfchallengingCrownstraditionalstrategiesandthoughtseriouslyofdrafting proceededtooutperformtheindustrysgiantsthroughoutthenextthreedecades.Ayoung anewblueprintforthefuture.23OneHundredYears,CrownCork&SealCompany,Inc.

24"ThesePennyPinchersDeliverABigBangForTheirBucks,"BusinessWeek,May4,1987. 25 Whalen,"TheUnoriginalIdeasThatRebuiltCrownCork."

12



793035

120,795 Total Metal Cans Shipped By Market For sale: Beverage Food General packaging Rank

Exhibit2

TopU.S.UsersofContainers,198988,810

92,394

101,899

109,214

For own use: 29,377 33 31,039 1 The Coca-Cola Companya $8,965,800 33 32,089 31 28,010 26 29,490 24 drinks Soft drinks, citrus juices, fruit Beverage 14,134 16,289 18,160 14,771 17,477 (Atlanta, GA) Food 15,054 14,579 13,870 13,167 11,944 2 Anheuser-Busch Companies, Inc.b 7,550,000 Beer, beer imports General packaging 189 Louis, MO) 171 59 72 69 (St. 3 PepsiCo Inc. 5,777,000 Soft drinks, bottled water By Product (Purchase, NY) Beverage: 56,326 63 61,456 67 76,773 70 86,695 72 4 The Seagram Company, Ltd. 70,177 69 5,581,779 Distilled spirits, wine coolers, mixers, Beer 30,901 33,135 35,614 36,480 37,276 (Montreal, Quebec, Canada) juices Soft drinks 25,425 28,321 40,293 49,419 5 Coca-Cola Enterprises, Inc.a 3,881,947 Soft drinks 34,563 (Atlanta, GA) 32 26,941 29 27,844 27 Food: 28,148 28,381 26 30,106 25 Philip Morris Companies, Inc. 3,435,000 Beer Dairy products 6 854 927 1,246 1,188 1,304 (New York, NY) Juices 13,494 11,954 11,385 11,565 12,557 7 The Molson Companies, Ltd. 1,871,394 Beer, coolers, beer imports Meat, poultry, seafood 2,804 3,019 3,373 3,530 3,456 (Toronto,3,663 Ontario, Canada) Pet food 3,571 4,069 4,543 5,130 8 John Labatt, Ltd. 1,818,100 Beer, wine Other 7,333 7,470 7,771 7,555 7,659 (London, Ontario, Canada) General packaging: 4,336 5 3,997 4 3,878 4 4,060 4 3,994 3 9 The Stroh Brewery Companyc 1,500,000 Beer, coolers, soft drinks Aerosol 2,059 2,144 2,277 2,508 2,716 (Detroit, MI) Paint: varnish 813 817 830 842 710 10 Adolph Coors Companyd 1,366,108 Beer, bottled water Automotive products 601 229 168 128 65 (Golden, CO) Other nonfoods 863 807 603 582 503 By Materials Source:BeverageWorld,19901991Databank. Used Steel 45,386 52 40,116 45 34,316 37 34,559 34 35,318 29 a Aluminum TheCocaColaCompanyandCocaColaEnterprisespurchased(vs.inhousemanufacture)allofitscansin1989.CocaCola 42,561 48 48,694 55 58,078 63 71 67,340 66 85,477owned49%ofCocaColaEnterprisesthelargestCocaColabottlerintheUnitedStates.bInadditiontoinhousemanufacturingatitswhollyownedsubsidiary(MetalContainerCorporation),AnheuserBusch CanShipmentReport,CanManufacturersInstitute,19811989. Source: Companiespurchaseditscansfromfourmanufacturers.ThepercentageofcansmanufacturedbyAnheuserBuschwasnot publiclydisclosed. cOfthe4to5billioncansusedbyTheStrohBreweryin1989,39%werepurchasedand61%weremanufacturedinhouse. dAdolphCoorsCompanymanufacturedallofitscans,producingapproximately10to12millioncansperday,fivedaysper

59,433 67 61,907 67 69,810 69 81,204 74 91,305 76 42,192 45,167 SoftDrink/ 13,094 12,914 BeverageSales 4,147 Company PrincipalProductCategories 3,826 ($000)

52,017 13,974 3,819

62,002 15,214 3,988

69,218 18,162 3,925

week.


793 35 1

Exhibit6



C o p y i n g o r p o s t i n g i s a n i n f r i n g e m e n t o f c o p y r i g h t . P e r m i s s i o n s @ h b s p . h a r v a r d . e d u o r 6 1 7 7 8 3 7 8 6 0

Exhibit5 Exhibit3Companya

ComparativePerformanceofMajorMetalCanManufacturers(dollarsinmillions) ComparativePerformanceofMajorAluminumSuppliers,1988(dollarsinmillions)Equity NetSales SG&Aasa Net %ofSales Gross Operating NetProfit Margin Income Net LongTerm Profit Return onSales Returnon Average Assets

Ball Corporation 1988 $1,073.0 8.1% $161.7 $113.0 $47.7 4.4% 5.7% 11.6% Alcan Aluminum 1987 1,054.1 8.5 195.4 147.6 59.8 5.7 7.8 15.7 1988 $8,529.0 $931.0 10.9% $1,199.0 15.2 1986 1,060.1 8.2 168.0 150.5 52.8 5.0 7.6 $4,320.0 $3.85 1987 6,797.0 445.0 6.5 1,336.0 3,970.0 7.5 1.73 1985 1,106.2 140.7 140.5 51.2 4.6 8.1 16.4 1986 5,956.0 177.0 3.0 1,366.0 3,116.0 7.9 .79 1984 1,050.7 174.1 123.9 46.3 4.4 7.8 16.6 1983 8.2 158.2 114.6 39.0 4.3 7.3 15.6 1985 5,718.0 25.8 .5 1,600.0909.5 2,746.0 .12 1982 5,467.0 221.0 4.0 1,350.0 2,916.0 8.4 889.1 147.4 100.5 34.5 3.9 6.9 15.8 1984 1.00 Crown Cork & Seal ALCOA 1988 9,795.3 861.4 8.8 1,524.7 4,635.5 2.8 1,834.1 264.6 212.7 93.4 5.1 8.6 14.5 1988 9.74 1987 1,717.9 2.9 261.3 223.3 88.3 5.1 8.7 14.5 1987 7,767.0 365.8 4.7 2,457.6 3,910.7 4.14 1986 1,618.9 2.9 235.3 202.4 79.4 4.9 8.8 14.3 1986 4,667.2 125.0 2.7 1,325.6 3,721.6 2.9 1.45 1985 1,487.1 216.4 184.4 71.7 4.8 8.6 13.9 1985 5,162.7 107.4 2.1 1,553.5 3,307.9 3.1 1.32 1984 1,370.0 186.6 154.8 59.5 4.4 7.3 11.4 1984 5,750.8 278.7 4.8 1,586.5 3,343.6 3.3 3.41 1983 1,298.0 182.0 138.9 51.5 4.0 6.2 9.3 Reynolds Metalsa 1982 1,351.8 3.3 176.2 132.5 44.7 3.3 5.2 7.9 1988 5,567.1 Heekin Can, Inc. 482.0 8.7 1,280.0 2,040.1 9.01 1988 4,283.8 200.7 4.7 1,567.7 1,599.6 3.7 275.8 38.9 36.4 9.6 3.5 4.8 22.6 1987 3.95 1987 230.4 4.0 33.6 30.2 8.8 3.8 5.8 26.3 1986 3,638.9 50.3 1.4 1,190.8 1,342.0 .86 1986 3,415.6 24.5 .7 1,215.0207.6 4.1 31.1 28.0 7.0 3.4 5.4 27.5 1985 1,151.7 .46 1985 3,728.3 133.3 3.6 1,146.1 1,341.1 3.2 221.8 31.8 29.0 6.8 3.1 5.2 42.5 1984 3.09 1984 215.4 2.7 28.4 26.5 5.5 2.6 4.3 79.7 1983 181.6 3.2 24.4 22.8 3.8 2.1 3.3 102.7 1982b -Source:ValueLine. Van Dorn Company 1988 333.5 16.5 75.3 26.7 11.7 3.5 6.6 12.2 aReynoldsMetalsCompanywasthesecondlargestaluminumproducerintheUnitedStates.Thecompanywasalsothethird 1987 330.0 15.7 73.6 28.4 12.3 3.7 7.7 12.7 largestmanufacturerofmetalcanswitha7%marketshare. 70.4 1986 305.1 16.3 26.5 11.7 3.8 7.7 12.9 1985 314.3 15.1 75.6 33.6 15.4 4.9 10.6 19.0 1984 296.4 14.7 74.9 36.5 16.8 5.7 12.9 24.9 1983 225.9 14.8 48.5 20.1 7.4 3.3 6.8 12.8 Exhibit4 MajorU.S.ProducersofBlowMoldedPlasticBottles,1989(dollarsinmillions) 1982 184.3 16.1 37.7 12.7 3.6 2.0 3.5 6.6 American Can Companyc 1985 2,854.9 22.6 1670.0 5.2 10.9 Company MajorMarket TotalSales NetIncome 813.4 PlasticSales 149.1 ProductCode 5.2 1984 3,177.9 18.0 740.8 168.3 132.4 4.2 4.9 11.2 1983 3,346.4 15.0 625.4 123.6 94.9 2.8 3.5 9.7 Owens-Illinois $3,280 $(57) $754 1,3,4,6 Food, health and beauty 1982 4,063.4 16.1 766.3 113.4 23.0 0.6 0.8 2.4 pharmaceutical 1981 4,836.4 15.0 949.6 223.0 76.7 1.2 2.7 7.2 American National 4,336 52 566128.1 85.7 1.8 3.1Beverage, household, 1,2,3,6 1980 4,812.2 15.8 919.5 8.0 personal care, National Can Companyd

PerShare Sales

Income

Margin%

Debt

NetWorth

Earnings

Returnon Average

Cnstar 544 12 544 1,2,3,4,6 Soft drink, milk, food 1982 1,541.5 4.6 1981 1,533.9 4.6 104 Johnson Controls 3,100 1980 1,550.9 Continental Can 3,332 18 353 1,2,3,4,5,6 5.4The Continental Group, Inc.e

1983

1,647.5

5.1

215.3 206.3 191.7 233.7 568.0 662.0 747.0 700.0 573.0

93.5 22.1 100.7 34.1 465 86.3 24.7 2 55.0 50.6

Silgan Plastics 19831982 1981 1980 1979 Sonoco

Source:ValueLineandcompanyannualreports(forSGA,COGS,andAssetfigures). a b c RefertoExhibit3forReynoldsMetalsCompany.Figuresnotdisclosedfor1982.In1985,packagingmadeup60%oftotalsalesatAmerican Can,withtheremainderinspecialtyretailing.In1986TriangleIndustriespurchasedtheU.S.packagingbusinessofAmericanCan.In1987, Source:TheRauchGuidetotheU.S.PlasticsIndustry,1991;companyannualreports. AmericanNationalCanwasformedthroughthemergerofAmericanCanPackagingandNationalCanCorporation.In1989,Trianglesold d e Productcode:(1)HDPE;(2)PET;(3)PP;(4)PVC;(5)PC;(6)multilayer. AmericanNationalCantoPechiney,S.A. In1985,TriangleIndustriesboughtNationalCan.In1984,PeterKiewitSonspurchasedThe ContinentalGroup.SG&AasapercentageofsalesforContinentalCanhoveredaround6.5%throughthelate1980s.

Products Co.

415 4,942.0 5,089.0 5,291.0 5,171.0 4,544.0 1,600

6.3 6.4 7.2 7.2 6.5

96

96

7.5 Soft drink, beverages Food, beverage, household, industrial 100 1,2,3,4,6 Food,3.5 beverage, 157.0 173.5 4.4 9.4 217.0 180.2 3.5 4.3 9.6 household, 261.0 242.2 4.6 5.9 pharmaceutical, 13.6 201.0 224.8 4.3 13.7 personal5.5 care 4.2 5.3 13.1 N/A171.0 189.2 1,3,4,6 Motor oil, industrial

1.3 2.2 1.6 3.3

2.7 4.4 10.0 3.1 6.4 16.7

pharmaceutical

6.3

16


793 35 9 1 0

Exhibit7

CrownCork&SealCompanyConsolidatedStatementofIncome(dollarsinmillions,yearendDecember31) 1956 1961 1966 1971 1973 1975 1977 979 1

C o p y i n g o r p o s t i n g i s a n i n f r i n g e m e n t o f c o p y r i g h t . P e r m i s s i o n s @ h b s p . h a r v a r d . e d u o r 6 1 7 7 8 3 7 8 6 0 .

793 35 0 2 0

CrownCork&SealCompanyConsolidatedStatementofIncome(dollarsinmillionsexceptearningspershare,yearendDecember31) Exhibit8 1981 1982 1983 1984 1985 1986 1987 988 1

979

C o Net Sales $115.1 $177.0 $279.8 $448.4 $571.8 $825.0 $1,049.1 $1,402.4 p y Costs, Expenses and Other Income: i n g Cost of products sold 95.8 139.1 217.2 350.9 459.2 683.7 874.1 1,179.3 o r Sales and administration 13.5 15.8 18.4 21.1 23.4 30.1 34.8 43.9 p Depreciation 2.6 4.6 9.4 17.0 20.9 25.4 5.6 16.4 o s t Net interest expense 1.2 1.3 4.6 5.1 4.4 7.4 31.7 40.1 i n g Provision for taxes on income .1 7.6 12.7 24.6 26.7 34.9 48.7 51.8 i s Net income .3 6.7 16.7 28.5 34.3 41.6 53.8 70.2 a Earnings per common share (actual) (6.01) .28 .80 1.41 1.81 2.24 3.46 4.65 n i n Selected Financial Statistics f r i n Return on average equity 0.55% 9.66% 16.44% 14.05% 14.46% 15.20% 15.88% 15.57% g e Return on sales 0.24 3.76 5.99 6.35 6.00 5.04 5.13 5.00 m e Return on average assets 0.32 6.00 6.76 7.25 8.00 7.69 9.13 8.93 n t Gross profit margin 16.76 21.43 22.37 21.76 19.69 17.13 16.68 15.90 o f Cost of goods sold/sales 83.24 78.57 77.63 78.24 80.31 82.87 83.32 84.29 c o SGA/sales 11.73 8.65 6.56 4.70 4.09 3.65 3.32 3.13 p y r i g h t . P e CrownCork&SealCompanyConsolidatedStatementofFinancialPosition(dollarsinmillions,yearendDecember31) r m i s s i 1956 1961 1966 1971 1973 1975 19771 o n s @ Total current assets $50.2 $ 66.3 $109.4 $172.3 $223.4 $265.0 $340.7 $463.3 h b Total assets 86.5 129.2 269.5 398.1 457.5 539.0 631.1 828.2 s p Total current liabilities 15.8 24.8 75.3 110.2 139.6 170.0 210.8 287.1 . h Total long-term debt 20.2 17.7 57.9 41.7 37.9 29.7 12.8 12.2 a r Shareholders equity v 50.3 77.5 110.8 211.8 243.9 292.7 361.8 481.0 a r Selected Financial Statistics d . e d Debt/equity 0.40 0.23 0.52 0.20 0.16 0.10 0.04 0.03 u 1.9 11.8 32.7 33.1 40.4 49.0 58.9 55.9 o Capital expenditures r 1.57 2.74 5.19 10.62 13.13 16.64 23.54 31.84 6 Book value per share of common 1 7 7 8 3 Source:AdaptedfromAnnualReports. 7 8 6 0 .

793 35 1 2 0

CrownCork&SealCompanyConsolidatedStatementofFinancialPosition(dollarsinmillions,yearendDecember31) Exhibit9 1981 1982 1983 1984 1985 1986 988 987 1$1,834.1

988

C Net Sales $1,373.9 $1,351.9 $1,298.0 $1,369.6 $1,487.1 $1,618.9 $1,717.9 o p Costs, Expenses, and Other y i Income: n g o Cost of products sold 1,170.4 1,175.6 1,116.0 1,172.5 1,260.3 1,370.2 1,456.6 r Sales and administrative 45.3 44.2 42.9 42.1 43.0 46.7 p o Depreciation 38.0 39.9 38.4 40.2 43.7 47.2 56.9 57.2 s t i Interest expense 12.3 9.0 9.0 8.9 12.2 6.2 8.9 10.0 n g Interest income -----i s Total Expenses 1,266.1 1,268.6 1,206.2 1,263.6 1,359.2 1,470.3 1,556.8 1,672.9 a n 107.8 83.2 91.8 105.9 127.9 148.6 161.1 161.2 i Income before taxes n f Provision for taxes on income 43.0 38.5 40.2 46.4 56.2 69.2 72.7 67.8 r i n g Net income 64.8 44.7 51.5 59.5 71.7 79.4 88.3 93.4 e m Earnings per common share 1.48 1.05 1.27 1.59 2.17 2.48 2.86 3.37 e n t Note:Earningspercommonsharehavebeenrestatedtoreflecta3for1stocksplitonSeptember12,1988. o f c o p y SelectedFinancialStatistics r i g h t . P 1981 1982 1983 1984 1985 e r m 11.72% 7.94% 9.34% 11.42% 13.94% 14.34% 14.46% 14.45% i Return on Average Equity (%): s s Return on sales 4.72 3.31 3.97 4.35 4.82 i o Return on average assets 7.38 5.19 6.20 7.31 8.58 n s Gross profit margin 14.81 13.04 14.03 14.39 15.25 @ Cost of goods sold/sales 85.19 86.96 85.97 85.61 84.75 h b SGA/sales 3.30 3.27 3.30 3.07 2.89 s p Net Sales ($): . h United States 775.0 781.0 749.9 844.5 945.3 a r v Europe 324.0 304.4 298.7 283.0 282.8 a r All others 283.6 273.1 259.1 261.3 269.3 d . e Operating Profit ($): d United States 62.8 58.9 55.0 67.1 88.9 u o Europe 20.6 19.0 24.0 17.2 17.0 r All others 40.0 37.3 33.1 38.3 40.6 6 1 Operating Ratio (%): 7 7 United States 8.1 7.5 7.3 7.9 9.4 8 3 Europe 6.3 6.2 8.0 6.0 6.0 7 All others 14.1 13.6 12.7 14.6 15.0 17.9 8 6 0 Source:AdaptedfromAnnualReports. .Note: Theabovesalesfiguresarebeforethedeductionofintracompanysales.

1,569.5 49.6 50.9 -(15.2)(14.8)

19864.91 8.80 15.36 84.64 2.88 1,010.3 365.6 269.0 92.8 21.9 39.6 9.7 5.9 14.7

1987

1

5.14 5.09 8.67 8.61 15.21 14.42 84.79 85.58 2.89 2.78 985.51,062.5 415.6 444.2 342.5 368.6 95.4 22.4 64.9 9.6 5.4 18.9 70.6 33.4 66.1 6.6 7.5

crown cork 1989_793035

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