What You Don’t Know Can Hurt You Moshe Even-Shoshan February 26, 2002 As world competition enters the 21st century, companies must seek new opportunities in foreign countries. Foreign opportunities mean bigger risks these days, in both political and commercial terms. Proactive management is required to reduce these risks. This mandates targeted business intelligence about individual companies and clearly defined business problems. This kind of intelligence could have prevented venerable beverage packaging giant Crown Cork & Seal’s downward financial spiral since its 1996 acquisition of a French competitor. Crown Cork & Seal’s share price in 1995 was $41.75. Following the purchase of CarnaudMetalbox, it hit a high of $60 in January, 1997. But by the end of 2000, it was down to only $7.44 and on Jan. 11, 2002 the share price was only $4.31— after previously sinking to a 52-week low of 83 cents “You emotionally think it’s a basket case. Then you look at the numbers and you realize it’s much worse,” Lehman Brothers analyst Joel Tiss opined early in 2001 to The Philadelphia Inquirer. He did allow that the company still had pretty good market positions all over the world. But Crown’s performance in the past few years has been far from its historical batting average. CC&S for more than a generation had prospered in a difficult business environment under CEO John Connelly by mitigating forces that still make packaging a low-margin industry and make CC&S a widely-used case study in many MBA programs. One account explains the company’s approach: a product strategy that focused on market segments where it had some advantage, cost reduction efforts, differentiating itself by service that reduced customers’ costs, optimizing its manufacturing operations, and providing customer-specific solutions that made it harder for them to switch vendors. Among the noteworthy elements of Crown’s traditional strategy are stressing efficiency and continually reducing longterm debt, together with an early commitment to an international strategy. A company like Crown typically generates higher profits by cutting costs or increasing volume. One observer notes the company was long set apart by its strong free cash flow, market-leading positions, and industry-leading operating margins. After 1989, the company embarked on a strategy of growth of its historic core metal packaging businesses and expansion into new product lines such as plastic containers through aggressive acquisitions under its new CEO William Avery. According to one observer, management was driven by its belief in the necessity of large size in order to compete and also the fear of a takeover in the vein of those so de rigeur during the ‘80s. So Crown made a series of domestic acquisitions through 1994 and also continued to invest in subsidiaries and joint ventures located in South America, Europe, Asia and the Middle East. But Crown’s margins were under pressure in 1993 and 1994 as can prices fell faster than aluminum prices. Cost cutting was not enough. CC&S began to focus more intently upon overseas operations and plastic bottles. In its drive to become the world’s largest packaging company, Crown management also wanted to become less reliant on the U.S. market. So it looked at expanding the scope of its non-U.S. operations, especially in Europe. Crown’s management identified European competitor CarnaudMetalbox as an attractive potential partner for a combination precisely because of the complementary fit between Crown’s strong presence in North America and CMB’s strong presence in Europe, as well as CMB’s presence in emerging Asia/Pacific and Middle East markets. Crown also saw growth prospects in CMB’s health and beauty packaging segment. The sale of CMB to Crown was announced in May, 1995, and Crown’s management figured on closing the transaction in September. But CMB’s rivals, including Pechiney SA of France and Schmalbach-Lubeca AG of Germany, surprised Crown by submitting to the European Commission a complaint that the combined company would stifle competition. Crown had not assumed that EC approval would be a cakewalk, but it was not prepared for the force of its competitors’ action and the time required to deal with their objections. The result was that Crown couldn’t complete the deal until February, 1996. The unexpected delay and pressure from investors for an immediate improvement in business results diverted management’s attention and prevented it from developing a better understanding of CMB’s operations. Instead, Crown embarked immediately on massive cost-cutting and much of CMB’s competitive advantage was lost. Then, in May, 1997, Crown was surprised again when Pechiney and Schmalbach-Lubeca spun off and combined their can manufacturing operations into Impress Metal Packaging Holdings. Impress proceeded to lower prices drastically, but also increased innovation and customer focus. “It was a very good move on their part,” Avery told The Philadelphia Inquirer. “I didn’t expect that.” Far from thriving and making Crown a global powerhouse, the European operations have struggled since the acquisition. In fact, Avery says the company’s European operations have restrained its overall profit growth. By the end of 2001, Crown had amassed nearly $5 billion in debt, most of it due to the CMB acquisition. Despite all the costs of its drive to be the world’s largest packaging company, Crown’s share of the beverage can market had slid to 15 percent from 26 percent. S&P had cut its debt rating to junk status and it continues to sell assets to finance payments on its overwhelming debt load. Now the company’s free cash flow is expected to be dedicated to making payments on debt. In short, as a writer for Bloomberg notes, “Almost from the moment the company announced the planned purchase, glitches started popping up.” Crown pleaded not guilty at the time and has blamed forces beyond its control. But it seems that the fault wasn’t in Crown’s stars but in itself. Sophisticated use of business intelligence should have been part of Crown’s due diligence on CMB. This would have given them insight into the real source of higher margins there that attracted Crown and the true potential for strategic costcutting in a company that unlike Crown focused on higher-end products. Instead, due diligence seems to have been purely financial and focused simply on determining a fair price for CMB. Crown management relied on a set of uniformly favorable assumptions. Instead, it should have used the tool of scenario planning, based not only on its starting assumptions and mindset but also on fresh intelligence collected from human sources both in the U.S. and overseas. Using scenario planning, Crown management would have been able to foresee both its European competitors’ delaying tactics and their subsequent strategic partnership and price cutting. Crown could then have developed a set of intelligence indicators for constant monitoring and early warning of adverse competitor moves. Crown’s management then wouldn’t have been knocked off balance and would have been able to act according to “shelf plans” that it had calmly and carefully worked out in advance.
