Case 2 :Carnival Corporation: Acquiring Princess Cruise Line(2002) Question: Carnival management and board of directors believed that demand would continue to increase well in to the future. Considering that only a small percentage of the North America market had taken a cruise Vacation, reaching more of the North American target market would improve industry profitability. Industry analysis stated that the “assessment of market potential” was only an “educated guess ”.
what if the current demand didn’t grow according to industry and cruise line projection? Answer:If there is uncertainty about demand increase, top management should recognize how carnival can improve its activities with current environment, so it seems review and reanalyzing the external and internal environment and current business and corporate strategies are important, then in the next step they can suggest some alternative strategies (according to demand depression)and then making decision about their new strategies (which can be current strategy or another kind of strategies) and start for implementation and finally evaluation and control to make necessary adjustment.Regarding to the above mentioned matters ,for answer this question first I will discuss about carnival external and internal environment to find out current opportunities, threats, weaknesses and strengths of the carnival, second I will try to explain Carnival current strategy, third, I will bring some strategic alternatives, then in the forth part, according to the environmental analysis which I mentioned in the first part, I will recommend a strategy which they should continue in demand depressed situation ,to improve their activities . First partCarnival Corporation External Environment(opportunities & threats) A)Social view Two-income families have more disposable income to apply toward vacations. (O) The aging of America means more potential customers for the Holland America Line, which serves an older, more established clientele. Increased emphasis on family vacations and a growing “family” cruise segment. (O) B)Technical view New ship program with long run view (O) More efficient systems used in new construction (O) C)Economic view Low interest rates (O) Slow down in U. S. and World economy (T)Impact of 9/11/01 on consumer spending (T) D)Political—Legal Fines for pollution ($18 million) (T) Terrorist Acts (T) CFC—corporation for tax purposes (T) Federal Maretime Laws Maretime Unions accusations of exploiting foreign crews (O/T) Task Environment (Porter 5 forces) in relation with Carnival Corporation Threat of new entrants is low, given the recent rash of cruise line failures, mergers and buyouts.
New entrants the competitive nature of the industry makes it unattractive to enter and high start-up costs serve as a barrier to entry. Rivalry among competitors is high.With overall increasing berth capacity—new ships. Bargaining power of suppliers (shipbuilders) is moderate since shipbuilding is a very money- and time-intensive process . If a shipbuilder can’t deliver on a contract, Carnival can’t easily obtain a replacement ship. Bargaining power of buyers may grow in the future due to the combination of increased berth capacity and decreased demand. The combination of these factors would lead cruise operators to offer deep discounts, and customers would have more affordable options in choosing the cruise they want.Threat of substitutes is escalating with the introduction of all-inclusive combination cruise/land packages such as Disney’s Big Red Boat vacations.
Bargaining power of other stakeholders such as the American Maritime Union pose a threat with their continued charges against Carnival (and other operators) concerning exploitation of cruise employees. Carnival Corporation Internal Environment Corporate Structure Carnival Corporation has major market segments: Premium Holland American Costa Cruises Luxury-Seabourn-Cunard-Contemporary-Carnival-Specialty-Westours-WindSail-Gray Lines of Alaska and SeattleOrganizational structure: Carnival Lines-Holland American-Costa Cruise Lines Cunard Lines Decision making is centralized with top management and the Board of Directors controlling all strategic decisions. The corporation attempts to reduce routine decision making by standardizing shipboard operations when possible. Corporate Culture Customer comes first Providing client with highest level of service while controlling costs To be a leader and an innovator Corporate Resources 1. Marketing Much of Carnival’s success is attributed to its marketing program directed toward the young, fun-seeking, first-time cruiser.One important aspect of the marketing program built upon the ship as the destination rather than some particular port of call. The main advertising theme has been that Carnival Lines is a “Fun Ship. ” Carnival has ships for all 4 segments (Luxury, Premium, Contemporary, and Specialty).
How to get people to feel safe after 9/11/01 (S/W) Carnival Corporation’s main marketing objective is to hold on to its 53. 6 percent market share in the cruise industry. It plans to retain the leadership position through aggressive promotional campaigns by gaining loyalty from former cruisers and by being innovative in shipboard activities and operations.Carnival’s cruise product is well-defined and positioned to serve three major markets: contemporary, premium, and luxury. Carnival Cruise Lines (contemporary) targets young and first-time cruisers with moderately-priced packages that include airfare and a variety of shipboard amenities. Prices are competitive with other similar cruise and land-based packages.
They have developed “Fun Ship” cruise theme that markets the ship itself as the primary vacation destination, with ports-of-call being of secondary importance.Holland America Lines (premium) is positioned to attract higher income travelers with cruise prices averaging 25–35 percent higher than Carnival Cruises. Carnival provides additional vacation opportunities through Westmark Hotels, Westours, Gray Line Tours, and the McKinley Explorer railroad coaches in Alaska. These auxiliary tours and hotels are marketed primarily to satisfy growing demand for Alaskan land vacations in conjunction with Carnival’s Alaskan cruises. Seaborne serves the luxury market with South American, Mediterranean, Southeast Asian, and Baltic cruise destinations.
Seaborne serves very wealthy clientele with worldwide cruises of durations of up to 98 days. Windstar Sail Cruises serves a specialty cruise niche on ships that have small capacity (less than 150 guests) which can approach smaller, less traveled ports-of-call. Carnival Corporation was the first cruise operator to advertise using television media. Carnival books 99 percent of their cruises through travel agents and has implemented an incentive program to reward travel agents that suggest a Carnival cruise before other vacations. Internet booking has impact on travel agents. . Finance Carnival Corporation is considered the leader and innovator in the cruise travel industry.
Carnival has grown from two converted ocean liners to an organization with two cruise divisions (and a joint venture to operate a third cruise line) and a chain of Alaskan hotels and tour coaches. Corporate revenues for fiscal 2001 reached $4,535,251,000 and net income of $926,200,000. Carnival has several “firsts” in the cruise industry: first to carry over one million passengers in a single year, and the first to carry five million total passengers.Currently, Carnival’s market share of the cruise travel industry stands at approximately 31.
8 percent Princess acquisition. The company owns 35 ships with a capacity of 50,265 berths. $5. 6 billion acquisition of Princess Line (S) 2002 booking down 9% (W) Berths maybe outgrowing demand. (W) Revenues up $757,208,000 (20.
0%) (S) Net Income down $39,258,000 (4. 07%) (W) Cash up $1,232,018,000 LT Debt up $855,777,000 (40. 7%) (W) Major expenses costs are airfares (25-30%), travel agents (10%), and labor (13-15%) Fixed costs are 33% of operating costs. CFC (Controlled Foreign Corporation) most all income tax exempt 3.Research and Development Carnival relies on R&D on the part of their shipbuilders to produce faster, more fuel efficient, technologically advanced ships. (S) Carnival also uses service R&D to implement and improve shipboard entertainment and activities to serve the disparate needs of the three market segments they serve.
(S) 4. Operations The company’s principal subsidiaries are: (1) Carnival Cruise Lines (2) Holland America Lines (3) Seaborne Cruise Lines (4) Costa Crociere was purchased in 1997 by Carnival and Airtours for $141 million. (5) Cunard Line, was purchased in 1998 and its two ships were merged with Seaborne.Fined $18 million for pollution. (W) Integrate Princess Lines into Carnival operations. (S/W) Main operations consist of the three cruise lines and the auxiliary tours and hotels mentioned in the analysis of marketing. (S) This expansion will enable Carnival to stay competitive with its rivals, who are also expanding, but if future demand remains depressed, this extra capacity could negatively affect future profitability. (S/W) The major strength of Carnival’s operations is that they are very efficient; they have the lowest break-even point (60%) in the cruise industry.
They have also been able to achieve significant economies of scale by standardizing layout and shipboard operations on its ships. Carnival’s fixed costs make up 33 percent of the company’s operating expenses, and can’t be reduced in proportion to decreases in passenger loads and revenues. Shipboard operations are very labor-intensive, which results in high labor costs.
Carnival Corporation’s cruises are also subject to general threats in the environment such as political conflicts and natural disasters in areas where they cruise. S) 5. Human Resource Management Cruises are labor-intensive, requiring extensive screening and hiring of employees (S/W) Employees work on contracts of 3 to 9 months and are recruited from mostly third-world countries. (S/W) Carnival had employees from 51 nations working for them. (S/W) Carnival has been cited by the American Maritime Union for exploitation of employees, but the average employment period is approximately eight years, and supply exceeds demand for all of the cruise employee positions. S/W) 6. Information Systems Carnival Corporation’s information system is assumed quite extensive to record passenger reservations taken from hundreds of travel agents and to orchestrate the daily operations of this large company. (S) The information system also appears to give very detailed breakdowns of expenses between cruise divisions and within cost categories.
(S) Second part Carnival Current Strategy(corporate strategy and Business strategy)Corporate strategy at present is growth through horizontal integration (Holland America acquisition of Princess Lines and Seaborne joint venture), internal development, the pursuit of shipbuilding, and the utilization of aggressive advertising/marketing campaigns. Carnival’s business strategy is differentiation in all segments. Such is being accomplished by featuring the short, fun, and affordable cruise vacations available to the masses (Carnival), service and scenery for experienced cruisers (Holland America), and ultra-luxury cruises for the upscale vacationer (Seaborne).Third part My suggested Strategic Alternatives in case of demand depression 1- Stability Strategy-Pause If there is possibility of decreased demand and the uncertainty of future demand, it may be better to delay contracting for any additional ships until cruise demand will rebound. Pros: (a)company wouldn’t be tying up their capital in additional ships when demand may not merit it. (b)This would allow the company to concentrate on refining their current operations and marketing strategy. (c)It may also lead to an improvement in the liquidity ratios.
Cons : (a) If demand does rebound and Carnival hasn’t ordered additional ships, there will be a time lag until they receive new ships. (b)In addition, if Carnival’s competitors continue expansion then the company runs the risk of losing its leadership position in the industry. 2- Growth Strategies 2-1 Move more aggressively into the family cruise market segment. Pros: (a)Taps a new, growing market with fewer competitors than the traditional cruise industry. (b)Allows alternate use of ships that aren’t being used if future demand remains depressed.Cons: (a)This strategy requires a new way of thinking to be successful in satisfying family needs.
(b)In addition, a lower price may be necessary to attract families who are looking for affordable vacations. (c)Major competitor, Disney, is a major force in the vacation industry. 2-2 Continue to pursue moderate expansion funded by internal growth. Pros: (a)This strategy allows Carnival to keep pace with their competitors, and the company’s low break-even point puts them at an advantage over competitors who are pursuing a similar expansion plan. b)Pursuing moderate expansion also allows Carnival to maintain its position as the market leader. (c)This seems to be the strategy that the company wants to pursue, and management has been successful in bucking negative industry trends in the past.
Cons: (a)If demand doesn’t rebound, the industry may face price wars and deep discounts. (b)This effect will be compounded by Carnival’s inability to cut fixed costs in the face of decreasing demand, and profitability may be sharply reduced. 3- Retrenchment Strategy Carnival currently isn’t in a position where retrenchment is recommended.However, if demand doesn’t rebound, retrenchment could become a necessity in the future. Fourth part My Recommended Strategy for Carnival regarding to present condition I recommend that the company continue to pursue its current growth plan.
Because this strategy allows Carnival to stay current with its competitors. And If demand remains depressed in future years, there will still time for Carnival to reassess its corporate strategy as long as they don’t delay indefinitely. Carnival Implementation according to my recommended strategyThe recommended strategy doesn’t require any extensive changes in current programs. Top management should closely monitor the industry and general economic trends to determine whether demand will rebound as expected.
If not, management should formulate alternate strategies that adjust to these conditions. Carnivval Evaluation and control according to my recommended strategy Carnival’s management needs to address the poor state of the company’s working capital and current ratio. These are of concern since a low current ratio may cause the company to default on certain debt covenants.However, the state of the working capital and current ratio may be normal when compared with industry standards since a large portion of the balance sheet assets are concentrated in fixed assets. The company’s information systems are sufficient to evaluate the performance of the recommended strategy and to separate costs associated with the expansion.
In closing, if Carnival carefully monitors future demand and makes necessary adjustments, I think they are in a good position to maintain their leadership position in the industry and continue to be financially successful. shiva hashemi