CARNIVAL CORPORATION-2007

STRATEGIC MANAGEMENT CASE STUDY PRESENTATION

Group Members Hammad Haider Ibthal Ahmed Muhammad Naeem Sohaib Ahmed

Lahore School of Economics

Presented to Saba Rana

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INTRODUCTION AND INTERNAL ASSESSMENT Carnival corportaion is a British-American owned cruise line, based in the Doral suburb of Miami, Florida in the United States. Originally an independent company founded in 1972 by Ted Arison, the company is now one of eleven cruise ship brands owned and operated by Carnival Corporation & plc. The company has the largest fleet in the group, with twenty three vessels currently in operation. Executive control of the company is provided by the North American division of Carnival Corporation, headquartered in Doral, Florida Carnival was a pioneer in the concept of shorter, less expensive cruises. Its ships are known for their Las Vegas-style decor and entertainment. The line calls its ships The Fun Ships, and there are a wide range of activities offered on board. Its trademark is the funnel, which is red, white and blue and shaped like a whale's tail. The mascot for Carnival is "Fun Ship Freddy", a character in the shape of Carnival's distinctive funnel. In 1996 the Carnival Destiny of 101,000 gross tons became the largest passenger ship in the world at the time. In 2004, Carnival Corporation ordered for a development program for Carnival's new ships, which was called the Pinnacle Project, which calls for a 200,000-GT prototype, which would have been the world's largest cruise ship. As of 2009, the latest and largest ship in the Carnival fleet is the Carnival Dream, a new 128,000 gross ton ship. The Carnival Dream entered service on 21 September 2009. After several voyages in the Mediterranean she is set to offer weekly Caribbean cruises from Port Canaveral from 5 December 2009. A sister ship, the Carnival Magic, debuted on May 1, 2011. On December 1, 2009 it was announced that Carnival placed an order for a third Dream-class vessel. It will enter service in June 2012 and will be homeported in Miami.On May 10, 2010, Carnival selected a name for their new Dream-class vessel in 2012; the Carnival Breeze. Mission Statement: Our mission is to deliver exceptional vacation experiences through the worlds best known cruise brands that cater to a variety of different lifestyles and budgets, all at and outstanding value unrivaled on land and or at sea

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Strengths: Large ship fleet Highest market share Financially strong, high profits High customer satisfaction

Weaknesses: Majority of the revenue comes from US customers, subject to uncertainty Over dependence on travel agents Lack of market development towards Asia Inability to dispose of gray and black water properly

IFE Matrix: Strengths Large ship fleet Highest market share Financially strong, high profits High customer satisfaction Weights 0.15 0.2 0.15 0.2 Rating 3 4 3 4 Score 0.45 0.8 0.45 0.8

Weaknesses Majority of revenues coming only from US Overdependence on travel agents Lack of market development towards Asia Inability of dispose of gray and black water 0.1 0.05 0.1 0.05 1.00 2 2 1 2 0.2 0.1 0.1 0.1 3.00

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EXTERNAL ASSESSMENT Industrial organization view: 1. Economies of Scale: Carnival Corporation benefits from this as they have the largest fleet in cruise industry hence they offer their customers cheap rates as economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. 2. Entry Barriers: the industry has a relatively a high entry barrier but has a low penetration level. This is because the cruise industry is at an early stage of development. Only 17% of the US population has ever taken a cruise. 3. Product Differentiation: Carnival attracts the major chunk by providing them with service much better than any of its competitor. Cruise industry invests heavily in innovating new ideas that attract customers. Offers them an experience that none other can provide them. To do so they make sure all the facilities are provided to them on board so feel like home. Ex: Spa, Gym, Cinema, Play Grounds etc 4. Level Of Competition: The volume of the cruise ship market is relatively small, with important barriers both to entry and exit associated with the extremely high cost of purchasing or selling a single cruise ship, and the high investment needed to maintain and manage a cruise line, which has a decisive influence on diverse aspects and strategies related to organizational and management issues.

Economic Forces: Economic factors play an important role in tourism. This market is very sensitive to changes in global economy and consumers discretionary income. In 2000 the cruise industry suffers greatly as the result of weak economic conditions. Since 2004 the cruise industry experienced an increase in both net revenue and capacity due to consumers having more money to spend. In the same way, the bargaining power and capability to take advantage of economies of scale present in the cruise industry are also affected by the size of the market in two different and contradictory ways: a) the presence of a few shipbuilders and technology developers in the industry forces the cruise companies to accept the prices and costs offered to them; b) the large number of suppliers of equipment, fuel and food products allows them to bargain for the best prices.

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Such a reduced number of companies allow them to watch closely for potential commercial threats in a constant competition for a clientele influenced by general economic conditions and with other vacation alternatives, such sightseeing vacations, land-based resort hotels, thematic parks, etc. A situation that has given place to diverse strategies and plans to identify and specialize in the specific areas within this business framework, resulting in a division of the cruise industry into well-differentiated sectors or market niches luxury, premium and contemporary that offer diversified and targeted cruise products and services to satisfy both mass consumer markets, interested in budget packages, and a distinctive clientele seeking the exclusive environment onboard small ultra-luxury ships. Marketing, innovation and brand image are therefore vital elements in such a competitive commercial environment, and key factors to succeed in a sector in a constant effort to find new sources of income and new strategies to maximize economic performance and profit.

Porters Five Forces Model: 1. Threats of entry: the easiest way to enter the cruise industry appears to be through mergers, acquisitions and take over. Carnival recently purchased Princess Cruise Lines in a merger deal for 5.67 billion. There are essentially three cruise market segments: contemporary, premium and luxury. Along with these types of cruise comes varying level of services and expertise. The high cost of training and maintaining exceptional employees for their shops, casinos, entertainment, hotel staff, world class chefs and of course the maritime staff requires a parent company with vast financial resources. Therefore the threat is low. 2. Threat of substitution: the cruise industry holds a unique position in that the threat of a substitution by another vacation activity by the current consumer market seems highly unlikely. Family cruisers are also growing in popularity. In fact, a cruise vacation is generally cheaper than a traditional vacation package. Many lines offer package airfare and cruise rates to their customers. An increasing number of lines are expanding their ports of call and destination to please the demand of todays diverse cruise market. Travel agents say demand for Alaskan cruises is high as post spat 11. 10% more passengers than last year mean more choices for travelers. 3. Power of Suppliers: A rise in fuel prices has been quite costly for the cruise industry who are not only directly affected by fuel cost for running their own ships but must raise ticket prices to cover the increase cost of flying due to high fuel prices and a hike in airfares. Quality, dependable suppliers are viral in order to ensure repeat cruisers. If food was good on the first cruise, consumers expect it to be up to par each time they

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cruise. This goes for advertising too. Carnival was the first cruise line to use television ads to promote itself. Travel services also pay an important role in promoting and fulfilling cruise reservations. Many publications also get the word out to first time cruise vacationers who are curious about what is available 4. Bargaining power of Customers: today cruise vacationers have many different line to choose from, each offering a slightly different spin on cruising. Most cruise lines target middle class vacationers with the grand ocean liner experience not found in decades. Many first time cruisers are lured in by moderately priced air and cruise package rates. Often one can buy a cruise vacation anywhere from 125-250 dollars per person. Most hotel stays in major cities are more expensive not including transportation as well as food. Along with low priced package rates, consumers area also demanding a unique vacation experience. Now as in the case study cruisers appeal to a younger, hipper audience and its easy to see why. Modern cruise ships are floating cities with everything within. Gym, cinema, ice skating, wall climbing etc.

Opportunities: Market development to Asia where large potential customer base is present New ships joining the present fleet will provide greater passenger capacity Implement the forward integration in a better manner in order make it convenient for the customers Attract the young generation more towards the cruise industry as they are in large number and can prove to be highly profitable Threats: Royal Caribbean poses a huge threat to the market leadership of Carnival Corporation Environmental issues Economic fluctuations Natural disasters

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EFE MATRIX Opportunities Market development to Asia New ships coming in to increase capacity Forward integration to increase customer satisfaction Attract youth Threats Royal Caribbean Environmental issues Economic fluctuations Natural disasters 0.2 0.05 0.1 0.05 1.00 3 3 2 2 0.6 0.15 0.2 0.1 2.75 0.2 3 0.6 Weight 0.2 0.1 0.1 Rating 2 4 3 Score 0.4 0.4 0.3

Conclusion: Carnival Corporations EFE score is just above average that show that they are making use of their opportunities well and curbing threats as well but still there is a need for improvement. COMPETITORS PROFILE MATRIX Carnival Corporation Critical Success Factors Break Even Cost Market Share Customer Loyalty Size of fleet Age of fleet Coverage Area Weight 0.1 0.1 0.2 0.2 0.05 0.05 Rating 3 3 4 4 3 2 Score 0.3 0.3 0.8 0.8 0.15 0.1 Royal Caribbean Rating 2 2 3 3 3 3 Score 0.2 0.2 0.6 0.6 0.15 0.15

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Reputation Advertising Market development Online booking and purchasing

0.1 0.05 0.1 0.05

3 3 2 2

0.3 0.15 0.2 0.1 3.2

3 2 4 3

0.3 0.1 0.4 0.15 2.95

Break even cost: It takes 60% of the total revenue to cover costs for CC while for RC it is 68%. Market Share: CC has 47% market share while RC has 31%. Customer Loyalty: Market share is a clear reflection of customer loyalty and satisfaction. Size of fleet: CC has the biggest fleet size of 81 while RC has 42. Age of fleet: CC has the latest fleet with 20 ships inducted recently that is better as compared to RC. Coverage Area: CC covers mostly North America and Australia while RC covers North America, Australia and also Asia. Reputation: Both have great reputation in the cruise industry. Advertising: CC pays more emphasis on advertisements; it uses various mediums such as radio, newspapers, TV and internet. On the other hand RC also advertises but not this extensively.

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Market development: RC has expanded its market to Asia while CC has not. Asia represents a huge potential customer base. Online booking and purchasing: RC has a better system when it comes to online booking and purchasing although CC is not lacking far behind.

STRATEGY FORMULATION Following strategies are implemented at Carnival Corporation: Forward Integration: Carnival Corporation has exercised forward integration by having greater control over the booking and selling of tickets as compared to the past. They have set up a highly interactive website that enables the customers to book tickets online instead of going to the travel agents. Moreover, they have also coordinated with Galileo, SABRE and Amadeus that helps in easy booking and purchasing of tickets. Horizontal Integration: Horizontal Integration is defined as the taking over of the competitors or having a control over them. Carnival Corporation acquired companies who were serving various market segments of the cruise industry and thus made its own position stronger than before. Those companies that were acquired have been mentioned below: Holland America Line Windstar Cruises Alaskan/Canadian tour operator Seabourn Cruise Line

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Costa Cruises Cunard Line P&O Princess Cruises

In this way Carnival Corporation decreased the overall competition in the industry and started various segments of the market that it did not target before. Such segments included people not so high income levels. Providing them with cruise facility was a big factor in making Carnival Corporation a success. Market Penetration: Seeking greater market share for present services and products with increased marketing efforts is called market penetration. Carnival Corporation penetrated the market in the following ways: Investing heavily in customer service by making it convenient for the customers to book their tickets through websites, telephone, wholesalers, and travel agents. They also advertised themselves using various mediums such radio, television, magazines and newspapers. In this way more and more customers were attracted by Carnival Corporation. Discounted offers were also given to the customers.

All these efforts allowed Carnival Corporation to increase its customer base, as a result their market share also increased and soon they became market leader in the cruise industry. Market development: Initially the Carnival Corporation provided cruise facilities to its customers travelling to Caribbean only from USA. But as they progressed and blossomed they started their started cruise facilities for Europe that included countries like, Greece, Turkey. Moreover, they also spread to Northern Europe and towards the Australian Continent. They also have a chance to serve the huge potential market of Asia. In doing so, they can expand a lot and become stronger than ever before.

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PORTERS GENERIC STRATEGIES Out of the five generic strategies that have been presented by Michael Porter, two are applied on Carnival Corporation. Those two are Cost Leadership- Low Cost Cost Leadership- Best Value

Low Cost: One of the main objectives of Carnival Corporation is to provide cruise services to travelers regardless of their budgets or income. In order to fulfill this objective they have set up their sub-brands such as Holland America, Windstar and Seabourn that provide low cost cruise to its travellers. Normally the cruise is regarded as very expensive and that only the elite can afford it but Carnival Corporation has made it feasible for the travellers with no so high incomes. In this way they have low cost leadership over their competitors. Best Value: While sub-brands like Holland America provide low cost trips, other sub-brands like Carnival Cruise lines and Costa Crociere provide luxurious cruise facilities to the elite class of people who can afford expensive trips. But Carnival Corporation makes sure that the facilities being provided to the highly paying customers is of the top most quality in the entire industry. Facilities like on-ship golf courses, skating rinks, beauty salons, spa facilities etc are provided to the on-board customers. They serve their customers better than their competitors even though the ticket prices might be similar.

MEANS FOR ACHIEVING STRATEGIES

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Every organization applies various means to achieve the strategies set by it. Two means that the Carnival Corporation has applied are mentioned below: Joint Venture/Partnering: In order to achieve the strategies of market penetration and forward integration mentioned above, Carnival Corporation has created a partnership with the leading airline computer reservation system. Those systems include: SABRE Galileo Amadeus Worldspan

All these systems enable the customers of Carnival Corporation to book and purchase their tickets either on telephone or through the internet. This excludes the role of travel agent which is lengthy and also expensive. Acquisition: When a larger organization purchases a smaller firm we say that an acquisition has taken place. Carnival Corporation has implemented the strategy of horizontal integration so that it can exercise greater control over its competitors. In order to achieve this strategy CC has used the process of acquisition and with time has acquired competing firms that were smaller in size. Holland America Line Windstar Cruises Alaskan/Canadian tour operator Seabourn Cruise Line Costa Cruises Cunard Line P&O Princess Cruises

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SWOT MATRIX Strength-Opportunity (SO) Strategy: One of the strengths of Carnival Corporation is that they have a large fleet size and have ordered further ship that will be added in their fleet very soon. As we have mentioned that there exists a huge opportunity in form of large potential customer base in Asia. Carnival Corporation can utilize their large fleet size in catering the potential customers of Asia and as a result expand their customer base. Weakness-Opportunity (WO) Strategy: Over dependence on travel agents for booking and purchasing of tickets often leads to inconvenience for the customers as the entire procedure is lengthy and sometime expensive as well. This has been one of Carnival Corporations weaknesses. They have an opportunity to increase customer satisfaction by implementing forward integration i.e. exercising greater control over distribution of tickets. In this way they can minimize the role of travel agents and allow the customers to book and purchase tickets through sources like telephone and the internet. Strength-Threat (ST) Strategy: The strength that the Carnival Corporation has in the form of large fleet size can be used to curb the threat posed by its biggest competitor which is Royal Caribbean. Royal Caribbean has expanded to places like Asia and is threatening to overtake Carnival. If Carnival uses its large fleet size in the proper manner and spreads to Asia and other untapped regions, they can maintain their supremacy in the cruise industry. Weakness-Threat (WT) Strategy: The inability of Carnival Corporation to deal with the wastes produced by its ships is posing a huge threat to them as the world moves towards more environmental friendly laws and regulations.

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Carnival should set up proper recycling units in their ships in order to recycle the gray water and make it feasible for use again and also decrease the toxicity of black water so that it is safely disposed of in the ocean.

QSPM FOR CARNIVAL CORPORATION STRATEGIC ALTERNATIVES

Market Development to Asia using the fleet Size Forward Int to add to customer satisfaction

KEY FACTORS Stre*ngths Large ship fleet Highest market share Financially strong, high profits High customer satisfaction Weaknesses Majority of revenues coming only from US Overdependence on travel agents Lack of market development towards Asia Inability of dispose of gray and black water

Weight 0.15 0.2 0.15 0.2 0.1 0.05 0.1 0.05 1.00

AS 4 3

TAS 0.6

AS

TAS

3 0.45 3 4 3 4 0.3 4 0.4

0.6 0.45 0.8

0.2

Opportunities Market development to Asia New ships coming in to increase capacity Forward integration to increase customer satisfaction Attract youth 0.2 0.2 0.1 0.1 4 3 0.8 0.3 4 0.4

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Threats Royal Caribbean Environmental issues Economic fluctuations Natural disasters 0.2 0.05 0.1 0.05 1.00 3.75 3.05 3 0.3 3 0.6 3 0.6