Carnival Cruise Lines Strategic Audit

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Carnival Cruise Lines Strategic Audit

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Group 2: Michael Kenlan Karen Maxwell Brian McKearney Tara Murphy Zach Smith

MIE 480, Spring 2010 North Carolina State University

Carnival Cruise Lines Strategic Audit TABLE OF CONTENTS Table of Contents ............................................................................................................................. i Executive Summary ........................................................................................................................ 1 Introduction ..................................................................................................................................... 2 External Enviornment anaylsis ....................................................................................................... 3 Porters Five Forces ...................................................................................................................... 3 Rivalry among Firms ............................................................................................................... 3 Buyers ...................................................................................................................................... 3 Substitutes ................................................................................................................................ 4 Suppliers .................................................................................................................................. 4 Other Stakeholders .................................................................................................................. 4 Internal Environment Analysis ....................................................................................................... 4 Carnival Cruise Line Business Model and Strategy.................................................................... 4 Financial Strategy and Improvements ......................................................................................... 5 Recommendations ........................................................................................................................... 6 Conclusion .................................................................................................................................... 87 References ..................................................................................................................................... 98 i111111111111111222222222
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Carnival Cruise Lines Strategic Audit EXECUTIVE SUMMARY Carnival Cruise Lines operates in the leisure travel market of the tourism industry. The barrier to entry is extremely high due to expensive ships, so competitors are easily defined. Despite the leading market share in the cruise industry, Carnival has experienced a slowing growth rate due to economic downturn. Carnival will look to maintain its current customer base, and attract tourists who would typically seek resort locations. Our recommendation for Carnival will boost sales growth and improve the vacation quality for the consumer. Carnival became successful by using a differentiation strategy, and providing the lowest cost cruises available. Providing more affordable trips to customers seeking a high value vacation has enabled Carnival to attract a larger customer base. Carnival offers countless amenities that provide enjoyable experiences for a multitude of customers. Carnival has positioned itself as the 'fun' cruise line and has rigorously marketed this image. As competitors catch up to Carnival, they will need to implement their next business strategy to promote healthy sales growth. Carnival's profitability ratios are below the industry averages but with improvements in efficiency, and asset turnover they can easily cure these indicators. Carnival is financially strong, but improving these performance indicators will boost their stock price and add to shareholder wealth. While Carnival Cruise Lines has been vastly successful there still lies one key improvement that they can make to ensure their continued success. Our recommendation for Carnival is to form a strategic alliance with Jet Blue. This move will enable Carnival to remove a barrier to some customers. Customers will be able to purchase their cruise and flight in one convenient portal. Driving to a port city is a major drawback for some customers. With this implementation, not only will Carnival benefit, but so will Jet Blue. Jet Blue is the perfect company to partner with Carnival because they alsoare also utilize a low cost strategy strategyprovide aprovide a fun atmosphere. Jet Blue will gain new customers while Carnival will be able to book more cruisers. This mutual relationship will help customers try out both companies and form a lasting relationship. One thing you don't want to be bothered with on vacation is a 14 hour drive. This recommendation alleviates that issue and adds value for the customer. In conclusion, Carnival currently has the leading market share for the cruise line industry. The tourism industry is heavily influenced by economic factors and cruises are no different. Carnival's strategy of differentiation and low-costs havestrategy of differentiation and low-costs has been successful up to this point, but they need to take steps to ensure that they remain the market leader. With a strategic alliance with Jet Blue, Carnival stands to book more cruises, ensure a more convenient vacation for travelers, and improve revenue. Efficient transportation to ports has yet to be addressed and this is an area that where Carnival can really make waves.
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Carnival Cruise Lines Strategic Audit INTRODUCTION

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Carnival Cruise Lines Strategic Audit External Enviornment anaylsis Carnival Cruise Lines operates in the leisure travel market of the tourism industry. According to research conducted by the Florida CCA, The cruise industry is the fastest-growing category in the leisure travel market. Since 1980, the industry has experienced an average annual passenger growth rate of approximately 7.5% per annum. Cruise lines operate in a two -fold environment, competing not only with other cruise lines, but also to attract customers from potential market substitutes such as land-resorts, hotels, theme parks, casinos, attractions, etc. This point, compounded by the rising cost of new ship construction and the tourism industrys undeniable marriage to global economic factors, has created an environment with an extremely high barrier to entry. Other key factors for the industry include the supply of vital inputs like air transportation. Before a customer can begin an exciting or luxurious cruise, he or she must live within driving distance of the port-of-call, or be willing and able to secure air transportation to the site. However, for the cost-conscious customer (Carnival targets the low price cruise market), rising fuel and airline ticket costs are a realistic concern.
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Porters Five Forces Michael Porter identifies five basic external forces which influence the degree of competition within an industry; potential entrants, rivalry among existing firms, buyers, substitutes, suppliers. A sixth element has also been added to acknowledge other stakeholders such as government powers, local community regulations, etc. (Hunger, 39). Potential Entrants Factors affecting the ability of new comers to enter the market include product differentiation and capital requirements. It is difficult for new cruise lines to enter this market since the level of start-up capital required to build or buy ships is extremely high. Case in point, EasyCruise attempted to enter the market, but is experiencing a great deal of difficulty getting off the ground and consumer reviews are far from exemplary. Rivalry among Firms Other well-known cruise lines include Royal Caribbean, Norwegian, and Disney, with Royal Caribbean posing the greatest competitor for Carnival. According to Cruisemarketwatch.com Carnival has 55% of the market in the US, while Royal Caribbean only has 27% and the next closest competitor is Norwegian with 10%. The circumstances are similar even in the international markets where Carnival leads with 52%, Royal Caribbean has 22%, and MSC lags behind with only 10% (Cruise Market Watch, 2010). Buyers Travel agents also play a key role in this industry seeing as how most cruises are purchased through this channel of distribution. Therefore, these middlemen wield a good deal of power to influence consumer purchases; for instance, agents can chose not to recommend a particular cruise line as a means of banding together to demand a higher commission (Dev, 302).

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Carnival Cruise Lines Strategic Audit Substitutes Substitutes for a cruise include many other types of vacations. A vacationer could choose to go to a theme part, a land resort, or go straight to their destination of choice by plane instead of cruising there. Price wise, a carnival cruise is defiantly the best option when you consider that lodging and food is included in the price. Beaches land resort offers a package that is within a hundred dollars of a carnival cruise if you take into account Beaches Resorts include things such as kayaking and snorkeling in their price but there is an additional charge to participate in these activities on a Carnival Cruise. Vacations at Sandals resorts and Disney World are considerably more expensive. Suppliers Suppliers for cruise ships include ship builders, ship maintenance, suppliers of furniture, suppliers of amenities such as shampoo, suppliers of food and alcohol, etc. Ship suppliers are dominated by a few builders leaving very few options for choices but one good thing to note is that it would not be plausible for suppliers of ships to decide one day that they just wanted to use the ships themselves. With the amount of supplies to make a ship a cruise ship and the manpower needed to run a ship it is not a likely threat. Cruise ships are affected by inflation just as everyone else who buys furniture, toiletries and food. Other Stakeholders Other stakeholders include employees and shareholders. Employees of Carnival are compensated more favorably than those of competitors, making it less likely that employees will make the decision to leave for another cruise line. Shareholders of Carnival suffered from a really big slump during the economic downturn but Carnival is recovering, slowly, but it is recovering. Stock prices have gradually been going up for the past year.
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INTERNAL ENVIRONMENT ANALYSIS Carnival Cruise Line Business Model and Strategy Carnival Cruise Lines serves more than 8.5 million people around the world annually who seek an exceptional vacation experience with no discrimination to lifestyle or budget level (Carnival Corporation, 2010). Carnival provides vacation cruises aboard luxurious cruise ships to popular destinations, with an emphasis on a relaxing and fun environment. Thus far, Carnival Cruise Lines has been able to maintain its current market share of 55% in the U.S. and 52% market share internationally, despite the aforementioned industry challenges, by using differentiation to sustain their competitive advantage (Cruise Market Watch, 2010). For instance, Carnival ships offer countless amenities and entertainment to the guest including concerts and performances, all-inclusive meals, casino gambling, bars, dance clubs, spa treatments, physical fitness equipment, outdoor cinemas, off-boat excursions, and much more. Offering this wide-range of products and services provides the guest with outstanding value, making Carnival the most profitable company in the leisure travel industry today. Carnival makes most of their money not
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Carnival Cruise Lines Strategic Audit on ticket sales, but on the up sale of the amenities and services provided while on the cruise (Frey, 2006). The majority of the revenue produced by Carnival Cruise Lines originates from onboard casinos, internet service, photographs, spa and salon services, liquor sales, onboard ship stores, and off-ship excursions.
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In addition, Carnival has attempted to differentiate i thets brand from competitors like Royal Caribbean and Princess Cruises by offering shorter, less expensive trips which are ideal for the younger target demographic. Providing more affordable trips to customers seeking a high value vacation has enabled Carnival to attract a larger customer base. Another successful technique is the organizations innovative and effective marketing plan (Wheelen, 1990). Carnival has aggressively launched extensive television ad campaigns to gain loyalty from experienced cruisers and to promote the breadth of its innovative shipboard activities to attract first-time customers. To sustain these advantages, Carnival utilizes their enormous amount of repeat business, is building new and innovative ships, and maintains a low break-even point. Carnival dedicates much effort in improving the competitive position of the companys products and services within the leisure industry it serves. To facilitate improvement, Carnival strongly focuses their efforts around the companys competitive business strategy coupled with the lower cost market strategy they employ (Dev, 2006). In doing so, Carnival Cruise Lines aims their aggressive marketing techniques toward the broad mass market, and implements cost reduction and overhead controls so ticket prices can remain lower than competitors. As a result of utilizing these strategies, Carnival develops high bargaining power in the purchasing process, and implements a barrier of entry for others attempting to join the industry. Financial Strategy and Improvements While Carnival's business strategy is well defined, they need to take some steps to improve their financial strength. Currently, Carnival's Return on Equity (ROE), Return on Assets (ROA), and sales growth are substantially below the industry average. These indicators are important to Carnival because they communicate their overall profitability. There are a few reasons why Carnival is below the industry averages in these categories and we will examine how Carnival can improve these key performance indicators. As a low-cost provider, Carnival generates a lower profit per cruiser but with a high volume of cruisers they are able to turn a profit. On paper their ratios are below the industry average but it is due to the large volume they process. Efficiency is an important aspect of these financial indicators and represents an opportunity for Carnival to improve their bottom line. To start with, ROE is the return on equity for shareholders. Carnival's ROE is currently 8.4% while the industry average is 12.3%. There are a few key steps Carnival can take to increase ROE which will improve the stock price and benefit shareholders. Carnival currently has 10% less debt than the industry average. While this sounds like a good thing, Carnival could benefit from leveraging theretheir position. With the largest market share, this would be a low-risk move because their future cash flows are fairly certain. Increasing their level of debt in their capital debt structure would put Carnival in a stronger tax position, and give them more capital to
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Comment [KM2]: Princess is owned by Carnival so Norwegian or Disney may be a better example may be a better example

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Carnival Cruise Lines Strategic Audit operate with. Carnival will also have more money to begin implementing our recommendation, which will improve ROE, sales growth and the stock price. To start with, ROE is the return on equity for shareholders. Carnival's ROE is currently 8.4% while the industry average is 12.3%. There are a few key steps Carnival can take to increase ROE. Carnival currently has 10% less debt that the industry average. While this sounds like a good thing, Carnival could benefit from leveraging their position. With the largest market share, Carnival's future cash flows are fairly certain so there is a low risk involved with increasing their capital debt structure. The benefits of increasing their capital debt structure would be leveraging their position, improving tax efficiency, and increasing shareholder wealth. . Similar to ROE, ROA represents Carnival's return on assets. This ratio is striking because Carnival is nearly 3% less than the industry average. To improve this ratio, Carnival will need to improve their asset turnover. This means they need to sell their inventories faster to patrons while on a cruise. This point is crucial because as the low-cost provider of cruises, higher turnover to the largest amount of customers will ensure a large increase in revenue generated. Another way to increase ROA would be to improve efficiency in terms of marketing expenses, general selling and administrative expenses. As a large company, Carnival can utilize economies of scale, and they already have a well positionedwell-positioned brand image. Carnival also stands to benefit from increasing their sales growth. Although growing sales will be difficult as the industry leader, they are actually in a strong position to increase their sales due to their existing position and a positive economic outlook. Carnival can increase their sales growth by expanding on their current market, expanding to new markets, and maintaining repeat customers. As a market leader, Carnival has a large opportunity to capitalize on word-ofmouth advertising and social-proof. Carnival needs to offer incentives for recruiting friends, which benefits both parties. This strategy gives them more reach than their advertising dollars and makes the marketing plan more comprehensive. Overall, Carnival can improve its financial ratios and bottom-line by improving their efficiency, asset turnover, and capital debt structure. Improving efficiency will not only cut overhead costs, but will improve profitability ratios. Increasing their capital debt structure is a low-risk move that will leverage their position and supply capital to implement our recommendation and increase sales growth. Given Carnival's already strong position in the market, these steps will only further improve the bottom-line and generate more profits, putting Carnival's financial ratios on par with the rest of the industry. Overall, Carnival can improve its financial ratios and bottom-line by improving their efficiency, asset turnover, and capital debt structure. Improving efficiency will help cut costs in terms of marketing expenses, general selling costs, and administrative expenses. Increasing their capital debt structure would be fairly low risk and would leverage their position as well as improve their tax position. With a leading market share and strong financial security, Carnival isCarnival is in a position to make the changes they need to with relatively low risk. RECOMMENDATIONSRECOMMENDATIONSRECOMMENDATIONS
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Carnival Cruise Lines Strategic Audit

While Carnival Cruise Lines has been vastly successful there still lies one key improvement that they can make to ensure their continued success. This is to develop a strategic alliance with an airline that will provide bilateral benefits to both parties. The point of this recommendation is to take down a large barrier to the purchase of a cruise: the additional purchase of an expensive airline ticket through a completely different portal. By Carnival teaming up with an airline to make it easy for its customers to purchase a ticket at the same time, and provide an added discount on the airline ticket to the customer, they will effectively remove a barrier to purchasing a cruise ticket and increase the number of tickets being sold by the airline that they choose. JetBlue is the ideal airline for Carnival to form this alliance with. JetBlue has the reputation of being a very fun airline. This fits well with Carnivals reputation of being the fun ships. Combine this with the fact that JetBlue services 94.1% of all cruises leaving Carnivals ports, nearly every person cruising with Carnival will be able to utilize the new program. In order for this alliance to work it must make good financial sense for JetBlue as well. The incentive would work as follows. In addition to being able to easily book your airline ticket when booking your cruise you would receive free checked baggage, allowing the customer to bring all of their cruise essentials without having to worry about baggage fees. JetBlue collects an average bag fee of $8 per customer. This in turn would be their assumed loss per customer by allowing for free bags. Assuming that 50% of people going on Carnival cruises must travel to port and that 50% of them will be swayed to purchase a JetBlue ticket instead of another airline, JetBlue would stand to make $8,519,000 off of the deal. See figure X.X for calculations.

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Avg Formatted: Font: 12 pt profit Formatted: Font: 12 pt, No underline, Font color: Auto % per Number of Number that swayed # swayed round Formatted: Space After: 12 pt, Line spacing: people cruising % that must must travel to towards towards trip Revenue from single new per year travel to port port airline airline ticket customersl Formatted: Font: 12 pt Formatted 8,519,000.00 50% 4,259,500.00 50% 2,129,750.00 $12 $25,557,000 ...
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Cost of bagage Number of Loss in Revenue per person customers due to deal $8.00 2,129,750.00 $17,038,000.00

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Carnival Cruise Lines Strategic Audit Net Gain from deal of $8,519,000.00 Number % that must Number that people cruising per year travel to port must travel to port

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% swayed towards airline

# swayed towards airline

8,519,000.00

50%

4,259,500.00

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Avg Revenue from profit new customers per round trip ticket 2,129,750.00 $12 $25,557,000

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Cost of baggage Number of Loss in Revenue per person customers due to deal $8.00 2,129,750.00 $17,038,000.00

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Net Gain from deal

$8,519,000.00

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Implementation would be relatively cheap and after the logistics of the alliance is formed can be carried out in about one monthsmonths time. While Carnival likely has its own web developers it would probably be the equivilentequivalent work of 3 developers for the months span costing Carnival only $$10,787.75 to make the website capable of handling both cruise and airline reservations. Additionally it would be wise to allot $500,000 to an advertising campaign to raise awareness of the new program bringing the grand total for implementation of the recommendation to $510,787.75. By teaming up with JetBlue, Carnival can effectively lower the barriers to the purchase of a cruise. They would also stand to help JetBlue out as well. CONCLUSION

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Carnival Cruise Lines Strategic Audit REFERENCES Hunger, J. D., & Wheelen, T. L. (2007). Essentials of Strategic Managment Fourth Edition. Upper Saddle River, New Jersey: Pearson Education Inc. Beaches: Resorts for Everyone by Sandals. (2010). Rates and Reservations. Retrieved Apr 15, 2010.from Beaches: Resorts for Everyone. Web site: https://obe.sandals.com/index. cfm?event =ehOBE.dspHome&REINITUSER=1&A=1&EVENT=ehOBE.dsp Home& BRAND=beaches Web site:
https://obe.sandals.com/index.cfm?event=ehOBE.dspHome&REINITUSER=1&A=1&E
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Cruise Market Watch. (2010). Cruise Market Shares. Retrieved Apr. 12, 2010, from Cruise Market Watch, Miami, Florida. Web site: http://www.cruisemarketwatch.com/blog 1/#share. Carnival Corporation. (2010). Corporate Information. Retrieved Apr. 13, 2010, from Carnival Corportation and plc, Miami, Florida. Web site: http://phx.corporate-ir.net/phoenix.zhtml ?c=20767&p=irol-prlanding.

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Dev, C. S. (2006). Carnival Cruise Lines: Charting a New Brand Course. Retrieved Apr. 9, 2010, from Entrepreneur. Web site:http://www.entrepreneur.com/tradejournals/article/ 149214179.html. Wheelen, T. L. & Hunger, J. D. (1999). Case Study - Carnival Cruise Lines, Inc - a Successful Company Rapid Growth. Retrieved Apr. 10, 2010, from Scribd. Web site: http:// www.scribd.com/doc/26363095/Case-Study-Carnival-Cruise-Lines-Inc-A-SuccessfulCompany-Rapid-Growth. Frey, David. (2006). The Carnival Cruise Line Profit Machine. Retrieved Apr. 10, 2010, from Evan Charmichael, New York, NY. Web site: http://www.evancarmichael.com/Marketing /77/The-Carnival-Cruise-Line-Profit-Machine.html. Hunger, J. D., & Wheelen, T. L. (2007). Essentials of Strategic Managment Fourth Edition. Upper Saddle River, New Jersey: Pearson Education Inc. Sandals. (2010). Reservations. Retrieved Apr 15, 2010.from Sandals. Website:
https://obe.sandals.com/index.cfm?event=ehOBE.dspHome&REINITUSER=1&A=1&E VENT=ehOBE.dspHome&BRAND=sandalshttps://obe.sandals.com/index.cfm?event=ehOBE.dsp Home&REINITUSER=1&A=1&E VENT=ehOBE.dspHome&BRAND=sandals

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Walt Disney World in Florida (2010). Tickets and Packages. Retrieved Apr 15, 2010 from Walt Disney World in Florida. Website:
http://bookwdw.reservations.disney.go.com/ibcwdw/en_US/_framework/components/prohttp ://bookwdw.reservations.disney.go.com/ibcwdw/en_US/_framework/components/pro

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Carnival Cruise Lines Strategic Audit

Dev, C. S. (2006). Carnival Cruise Lines: Charting a New Brand Course. Retrieved Apr. 9, 2010, from Entrepreneur. Web site:http://www.entrepreneur.com/tradejournals/article/ 149214179.html. Wheelen, T. L. & Hunger, J. D. (1999). Case Study - Carnival Cruise Lines, Inc - a Successful Company Rapid Growth. Retrieved Apr. 10, 2010, from Scribd. Web site: http:// www.scribd.com/doc/26363095/Case-Study-Carnival-Cruise-Lines-Inc-A-SuccessfulCompany-Rapid-Growth.

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