Administration Essay Example

industrial purposes. Glass and plastic containers accounted for 21% and 1% of the market share respectively.

The beverage, food, and general packaging industries used metal cans. These cans were made of either aluminum, steel, or a combination of both materials. Three-piece cans were created by rolling a metal sheet, soldering it, cutting it to the appropriate size, and attaching two ends to form a seamed can. Steel was the main material used for three-piece cans. Professor Stephen P. Bradley and Research Associate Sheila M. Caving prepared this case on three-piece cans, which serves as the sole basis for class data or as illustrations of effective or ineffective management.

The copyright for this publication is held by The President and Fellows of Harvard College. To request permission or order copies, please contact Harvard Business School Publishing at 1-800-545-7685, write to their address in Boston, MA 02163, or visit their website at http://www. Hobs. Harvard. Deed.

It is important to note that reproducing, storing, or transmitting any part of this publication without permission from Harvard Business School is strictly prohibited. Additionally, the text emphasizes the popularity of the 793-035 crown cork & seal 1989 in both the food and general packaging industries.

In the sass, a molding process called "drawn and ironed" was widely used by aluminum and steel companies to make two-piece cans. Originally developed by aluminum companies, this technology was later adopted by steel companies to produce thin-walled steel cans. By 1983, two-piece cans had become the preferred choice for beer and soft drink manufacturers in the beverage industry. In 1989, around 80% of the total 120 billion cans produced were two-piece cans.

During the

1980s, the annual growth rate for metal can shipments was 3.7%. Specifically, aluminum can growth had an average annual growth rate of 8%, whereas steel can shipments declined by an average of 3.%. In the period of 1980-1989, the production of aluminum cans saw a significant increase of nearly 200%, reaching a peak of 85 billion cans. Conversely, steel can production decreased by 22% to 35 billion cans during that same period (refer to Exhibit 1). The U.S. metal can industry, valued at $12.2 billion, was dominated by five major firms who held a collective market share of 61% in 1989.

American National Can, the largest manufacturer in the country, held a 25% market share. Following American National in sales were Continental Can (18% market share), Reynolds Metals (7%), Crown Cork & Seal (7%), and Ball Corporation (4%). Approximately 100 firms served the remaining market. The can industry had highly competitive pricing. Managers aimed to reduce costs by focusing on long runs of standard items, increasing capacity utilization, and minimizing expensive changeovers. Consequently, many companies provided volume discounts to incentivize large orders.

The metal can industry experienced a decline in operating margins between 1986 and 1989, as a result of several factors. These factors include a 15% increase in aluminum can sheet prices, a 7% rise in beverage can production capacity, major brewers producing their own containers instead of purchasing them, and soft drink bottlers negotiating packaging price discounts to gain market share. This, combined with a surplus in production capacity and a shrinking customer base, put significant pressure on manufacturers' margins. To maintain market share, can manufacturers offered aggressive discounts, resulting in lower industry prices

compared to ten years ago. The Coca-Cola Company, Enhancers-Busch Companies Inc., Pepsico Inc., and Coca-Cola Enterprises Inc. were among the largest customers in the industry (see Exhibit 2).

The soft drink segment of the bottling industry experienced consolidation, resulting in a decrease in the number of bottlers from approximately 8,000 in 1980 to about 800 in 1989. This led to a concentration of beverage volume among a few large companies. Both soft drink bottlers and brewers had relationships with multiple can suppliers because cans accounted for around 45% of the total cost of a canned beverage. If service was subpar or prices were not competitive, it could lead to smaller order sizes. Manufacturers strategically positioned their plants near customers to minimize transportation expenses due to the bulky nature of cans.

The main cost elements of the metal can are raw materials at 65%, direct labor at 12%, and transportation at approximately .5%. The preferred material for beverage cans is aluminum due to its lighter weight and lower shipping costs compared to steel. In 1988, aluminum cans weighed less than half of what steel cans did. Overseas markets were served through joint ventures, foreign subsidiaries, affiliates of US can manufacturers, and local overseas firms, as the costs of transporting cans internationally were not economical. Two-piece can lines cost around $16 million, and with peripheral equipment, the cost per line increased to $20-$25 million. The minimum efficient size for a plant was one line, with installations ranging from one to five lines. Despite the popularity of two-piece can lines, they did not completely replace the three-piece can lines.

In 1989, the food and general packaging segment accounted

for 28% of the metal container industry. Unlike the beverage segment, which had fully transitioned to two-piece cans by 1983, the food and general packaging segment continued to use three-piece cans. The cost of a typical three-piece can production line ranged from $1 to $2 million. Additionally, a finishing line capable of handling the output of three or four can-forming lines required a minimum investment of $7 million in basic equipment. Most plants had 12 to 15 lines, which provided increased flexibility in managing different types of cans simultaneously.

However, if there were more than 15 lines, it became cumbersome because set-up crews, maintenance, and supervision needed to be duplicated. The beverage industry's transition from three-piece lines to two-piece lines led many manufacturers to sell complete three-piece lines "as is" for $175,000 to $200,000. Some companies shipped their old lines to their foreign operations where there was great growth potential, few established companies, and limited understanding of canning technology. Suppliers of steel had been struggling against aluminum since the invention of the aluminum can in 1958.

In 1970, steel accounted for 88% of metal cans, but by 1989, it had dropped to 29%. Despite its advantages such as being lighter, of higher quality, more consistent, and easier to recyle, aluminum also had superior taste and lithography qualities. By 1989, aluminum dominated the metal container businesses with 99% share in the ere category and 94% in the soft drink category. The major players in the aluminum industry were Alcoa and Local, the world's largest aluminum producer and marketer respectively. They supplied over 65% of the domestic can sheet requirements. Reynolds Metals, the second-largest aluminum producer in

the United States, also supplied aluminum sheets and produced about 11 billion cans. Reynolds Metals was the sole domestic aluminum can manufacturer. Despite these advantages, steel maintained a consistent advantage over aluminum due to its lower price.

In 1988, aluminum prices increased (J. J. Sheehan, "Nothing Succeeds Like Success," Beverage World (November 1988): 82). In 1985, aluminum cans were limited to carbonated beverages as their carbonation prevented the cans from collapsing. Reynolds discovered that by introducing liquid nitrogen to the can's contents, aluminum containers could accommodate various beverages and maintain their shape. This innovation allowed Reynolds to produce cans for liquor, chocolate drinks, and fruit juices. As a result, aluminum prices rose by an estimated 15%, while steel prices only saw a modest increase of 5% to 7%.

A representative of Alcoa stated that the firm has decided to restrict the aluminum industry. In the sass, the metal container industry witnessed several major trends. These included the persistent risk of in-house manufacturing, the rise of elastics as a feasible packaging material, continuous competition from glass as a substitute for aluminum in the beer market, the soft drink industry becoming the biggest user of packaging with aluminum being the main beneficiary, and increased diversification and consolidation among packaging producers.

Approximately 25% of the total can output in 1989 was produced by "captive" plants, which refers to plants that produce cans for their own company use. This increase in in-house manufactured cans occurred at plants owned by major food producers and brewers throughout the sass decade. Large brewers specifically chose to invest in captive manufacture in order to control can costs, as it allowed them to conduct

high-volume, single-label production runs.

Adolph Coors went to great lengths to produce their own cans and obtain most of their aluminum from their sheet rolling mill in San Antonio, Texas. By the 1980s, the beer industry was capable of meeting about 55% of its can requirements. However, captive manufacturing was not as common in the soft drink industry, as it was more geographically dispersed due to the presence of small bottlers and franchise operations.

Soft drink bottlers discovered that it was not cost-effective to manufacture cans themselves. During the 1980s, plastics experienced substantial growth in the container industry, with its market share doubling from 9% in 1980 to 18% in 1989. In the United States, sales of plastic bottles were expected to reach $3.5 billion in 1989, with food and soft drinks contributing half of that amount. The widespread adoption of plastic bottles resulted in them representing 11% of domestic soft drink sales as they replaced glass bottles.

Plastic's lightweight and easy handling made it widely accepted by consumers, but its biggest challenge was retaining carbonation and preventing oxygen infiltration. Plastic bottles released carbonation in less than four months, while aluminum cans kept it for over 16 months. Meeting the minimum 90-day shelf life requirement for beer containers posed a problem for plastic. Additionally, plastic struggled to meet production line standards that demanded perfectly flat-bottomed containers filling at a rate of 2,400 beer cans per minute. The growth of plastics slowed after 1987 possibly due to industry reports on containers and packaging. Unlike glass and aluminum, plastics recycling lacked a closed loop system. In 1988, there were numerous small players in the plastic container market specializing

in different end-uses or geographic regions; however, only seven companies had sales exceeding $100 million. Emotionless stood as the primary manufacturer of personalized plastic bottles and closures for various industries such as food, health and beauty, and pharmaceuticals. Their specialization extended to prescription containers mainly distributed to drug wholesalers, major drug chains, and government bodies.

Constant, the second-largest domestic producer of plastic containers, purchased its plastic bottle operation from Owens-Illinois and depended on plastic soft drink bottles for approximately 66% of its sales. Johnson Controls operated 17 U.S. plants and six non-U.S. plants to manufacture bottles for the soft drink industry and held the top position in producing plastic bottles for water and liquor. American National and Continental Can also produced plastic bottles for food, beverages, and other items such as tennis balls (refer to Exhibit 4 for competitor details).

Glass bottles made up only 14% of domestic soft drink sales, falling behind metal cans at 75%. The cost advantage that glass had over plastic in the commonly used 16-ounce bottle size disappeared in the mid-sass due to consistently declining resin prices. Additionally, soft drink bottlers favored metal cans over glass due to several logistical and economic benefits, including faster filling speeds, lighter weight, compactness for inventory, and transportation efficiency.

In 1989, the price of a 12-ounce can (including closure and label) was about 15% less than that of a 16-ounce glass or plastic bottle, which were the most popular sizes at the time. However, glass bottles remained more favored than metal ones in the beer category because consumers preferred the "long neck" bottle. This trend persisted in subsequent years. Soft drinks dominated packaging usage

in the 1980s, accounting for over half of the entire beverage market.

The shipment of metal cans in the soft drink industry rose from 29% in 1980 to 42% in 1989, with the aluminum can benefiting the most. This increase in aluminum's usage can be attributed to its lighter weight compared to glass and steel, easier handling, and wider variety available. The growth of aluminum was also supported by the vending machine market, which primarily sold canned soft drinks and accounted for roughly 20% of all sales in 1989.

Around 60% of Coca Cola's beverages and 50% of Pepsin's beverages were packaged in metal cans. In 1989, Coca Cola Enterprises and Pepsi Cola Bottling Group accounted for 22% of all soft drink cans shipped. The industry shipped 15.9 billion aluminum soft drink cans in 1980, which increased to 49.2 billion by 1989, representing a growth rate of 12% per year on average. This growth occurred during a decade where there was a yearly increase of 3.6% in total gallons of soft drinks consumed. To address public concern, the container industry developed efficient "closed loop" recycling systems.

The flow of containers in the supply chain goes from the manufacturer to the wholesaler, distributor, retailer, and then the consumer. After that, they go back to the manufacturer or material supplier for recycling. Can manufacturers were able to sell cans to beverage producers at a lower cost because of the high recycling value of aluminum. However, the recycling of steel cans was not as successful due to the lack of significant energy or material cost advantages in collection and recycling. The sass and sass saw diversification and consolidation in

the corporate sector due to low profit margins, excess capacity, and increasing material and labor costs. Some can manufacturers diversified into other rigid containers for different markets, while others ventured into industries such as energy and financial services.

In the span of 20 years, American Can decreased its reliance on domestic can manufacturing and ventured into various unrelated industries, including insurance. From 1981 to 1986, the company spent $940 million on acquiring six insurance companies, either in whole or in part. Eventually, Triangle Industries acquired American Can's packaging businesses in 1986, while the financial services businesses resurfaced as Primaries. Similarly, Continental Can underwent significant diversification and changed its name to Continental Group in 1976 when can sales accounted for only 38% of total sales.

Continental Group previously invested heavily in energy exploration, research, and development. However, they faced low profits and were eventually acquired by Peter Kiewit Sons in 1984. In contrast, National Can primarily focused on manufacturing containers but expanded their operations by acquiring companies involved in glass containers, food canning, pet foods, bottle closures, and plastic containers. Rather than pursuing future growth opportunities, John W. Fisher of Ball Corporation opted to enter the high-technology market. By 1987, they successfully secured $180 million in defense contracts.

Fisher guided Ball into various industries including petroleum engineering equipment, photo-engraving, and plastics. As a result, the company became a prominent producer of computer components. In the metal can industry, three out of the current five main competitors had dominated for over 30 years. American Can, Continental Can, Crown Cork ; Seal, and National Can held the top four positions in can manufacturing since the early sass decade.

Furthermore, mergers and acquisitions in the sass by various leading manufacturers reshaped and consolidated power at the top of the industry.

In 1989, fourth-ranked Crown Cork ; Seal identified four firms as its primary competitors: American National Can, Continental Can, Reynolds Metals, and Ball Corporation. Additionally, Van Odor Company and Weaken Can were strong regional competitors (see Exhibit 5). American National, a wholly-owned subsidiary of the Eyepiece International Group, achieved $4 billion in sales revenues in 1988. Triangle Industries, a New Jersey-based company specializing in video games, vending machines, and Jukeboxes, acquired National Can for $421 million in 1985. A year later, Triangle purchased the U. S. Packaging businesses of American Can for $550 million. Then in 1988, Triangle sold American National Can to Eyepiece, S. A., the French state-owned industrial concern, for $3.5 billion. Eyepiece was not only the world's third-largest aluminum producer but also a significant European packaging manufacturer through its Cabal Group.

NC, a member of the Eyepiece International Group, was the world's largest beverage can maker, manufacturing over 30 billion cans annually. With a presence in 12 countries and over 100 facilities, NC offered a wide range of products including aluminum and tin cans, glass containers, and caps and closures. Serving the major beverage, food, pharmaceuticals, and cosmetics markets, NC was known for its financial stability. Continental Can, a subsidiary of American National Can, experienced uninterrupted revenue growth from 1923 through the mid-1900s.

In the United States, Continental had become the biggest container company, surpassing American Can by the sass. However, in 1984, there was a significant turning point in Continental's history when it was acquired by an attractive Nebraska and

bought for $2.75 billion. Vice Chairman Donald Strum led the effort to restructure Continental Group and make it a more profitable operation. Within a year, Strum successfully sold insurance, gas pipelines, and oil and gas reserves worth $1.6 billion.

The number of staff at Continentals Connecticut headquarters was reduced drastically from 500 to 40. In 1988, Continental Can generated sales revenues of $3.3 billion, making it the second highest ranking company after American National. Towards the end of the sass era, management at Kiewit contemplated divesting Continental Can's packaging operations, which comprised of Continental Can USA, Europe, and Canada, as well as metal packaging operations in Latin America, Asia, and the Middle East. Reynolds Metals, based in Richmond, Virginia, was the only domestic company that had integration from aluminum ingot to aluminum cans.

Reynolds, with 1988 sales revenues of $5.6 billion and net income of $482 million, served several markets including packaging and containers, distributors and fabricators, building and construction, aircraft and automotive, and electrical. In 1988, Reynolds' packaging and container revenue reached $2.4 billion. As a leading can maker in the industry, Reynolds played a significant role in finding new applications for the aluminum can and was an international leader in can-making technology.

Reynolds' advancements encompassed high-speed can-forming machines that could produce over 400 cans per minute, faster inspection equipment operating at speeds up to 2,000 cans per minute, and spun aluminum tops with reduced material usage. The installation of the company's upcoming can end-making technology was planned for the early sass. Established in 1880 in Muncie, Indiana, Ball Corporation achieved an operating income of $113 million from sales revenues of $1 million in

1988.

Ball, a leading player in the industry, was ranked as the United States' fifth-largest producer of metal containers and third-largest manufacturer of glass containers. In 1988, their packaging businesses were responsible for a majority of their sales and earnings - specifically contributing to 82.5% of total sales and 77.6% of consolidated operating earnings. With their can-making technology and flexible manufacturing capabilities, they could manufacture customized, high-profit products in shorter production runs to meet individual customer requirements. Additionally, beverage can sales made up a significant portion by representing 62% of total sales in 1988.

In 1989, Enhancers-Busch, the largest customer of Ball's, accounted for 14% of sales. There were rumors that Ball was planning to acquire the remaining stake of its Joint venture, Ball Packaging Products Canada, Inc., which it owned 50% of. This acquisition would make Ball the second biggest producer of metal beverage and food containers in the Canadian market. Van Odor Company and Weaken Can, Inc. were the industry's next two largest competitors, with a combined market share of 3%. Van Odor, founded in Cleveland, Ohio in 1872, manufactured containers and plastic injection molding equipment as part of their product lines.

Van Odor was a prominent player in the global market for drawn aluminum containers used in processed foods. Additionally, they were a significant producer of metal, plastic, and composite containers for various industries such as paint, petroleum, chemical, automotive, food, and injection molding equipment for plastics. The company's Davies Can Division, established in 1922, operated as a local manufacturer of metal and plastic containers. In 1988, Davies had plans to construct two new can manufacturing plants, with each facility costing

approximately $20 million. These plants were projected to have an annual production capacity of around 40 million cans per plant.

In 1988, Van Odor's consolidated can sales amounted to $334 million, placing it as the sixth largest can manufacturer in the country. Weaken Can was founded in 1901 by James Weaken, a Cincinnati coffee merchant, as a means to package his own products. The company saw impressive growth and became home to one of the largest metal lithography plants in the nation. Over three generations, the Weaken family transformed Weaken into a prominent regional player in the packaging industry. In 1965, the family sold the business to Diamond International Corporation, a publicly held company with diversified interests.

Diamond operated Weaken as a subsidiary until 1982 when it was sold to its operating management and a group of private investors. Weaken became a publicly traded company in 1985. By 1988, Weaken had achieved sales revenues of $275.8 million, making it the seventh largest manufacturer of steel cans for food and pet food processors, packagers, and distributors. As the country's largest regional can maker, Weaken held a significant position in the market. Crown Cork & Seal Company Company History dates back to August 1891 when a foreman in a Baltimore machine shop invented a superior bottle cap made of tin-coated steel with a flanged edge and a natural ark insert.

The crown-cork cap quickly became a popular product for Crown Cork & Seal Company. Although the company faced intense competition and financial struggles when their patents expired, they were saved when Charles Unmans, a rival, bought them in 1927. Under Unmans' guidance, Crown thrived in the sass

era and dominated the bottle cap market in the United States and worldwide. Recognizing the potential of beer cans, Unmans expanded the company into can manufacturing and constructed a massive facility in Philadelphia.

However, despite its one million square feet and 52 assembly lines, the company was highly inefficient and incurred significant losses. Despite being a dynamic leader, Unmans practiced nepotism and failed to establish a self-sufficient organization. After his death in 1946, the company relied on its existing momentum, prioritizing dividend payments over investing in new facilities. This led to a disastrous foray into plastics and an ill-advised diversification into metal bird cages.