26363095 case study carnival cruise lines inc a successful company rapid growth

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CASE 13 CARNIVAL CORPORATION (1998) I. CASE ABSTRACT Carnival Cruise Lines, Inc., was founded by Ted Arison in 1972. From its inauspicious beginning, Carnival became known for fun-filled Caribbean cruises. Ted retired in 1990 as Chairman. His son, Micky Arison, CEO, then became Chairman. Carnival is considered a 'Controlled Foreign Corporation' (CFC), which exempts shipping operations of a corporation from income tax. 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 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 1997 (as of November 30, 1997) reached $2.9 billion with income from operations of $666 million. 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 26% overall. The company’s passenger capacity increased from 17,973 in 1991 to 31,078 in 1997. The company's principal subsidiaries are: (1) Carnival Cruise Lines, which has 11 ships with a total of 20,332 berths and operates principally in the Caribbean. (2) Holland America Lines, which has 8 ships with a total of 10,302 berths and mainly cruises Alaska in summer and Caribbean during the fall and winter. The 1989 acquisition also included Holland America Westours, largest tour operation in Alaska and Canadian Rockies, Westmark Hotels, 16 hotels in Alaska and the Yukon Territories, and Windstar Sail Cruises, three computer-controlled sailing vessels operating primarily in the Mediterranean and the South Pacific. (3) Seaborne Cruise Lines, a joint venture (50% owned) targeting the luxury market with 2 ships, which can accommodate 200 passengers per ship. (4) Airtours, of which the company purchased a 29.5% interest in 1996, was the world’s largest air-inclusive tour operator. It owned 31 aircraft and 2 cruise ships and operated 32 hotels. (5) Costa Crociere was purchased in 1997 by Carnival and Airtours for $141 million. Considered Europe’s largest cruise line with 7 ships and 7,710 berths. In 1998, Costa signed to build its 8 th ship. (6) Cunard Line, a 50% interest purchased in 1998 and merged with Seaborne. The industry is characterized by over-capacity, intense competition, and larger new ships. In 1998 Walt Disney added 2 new ships (2,400 passengers per ship). The industry's present problems should intensify in the years to come. Copyright © 1999 by Thomas L. Wheelen and J. David Hunger. Reprinted by 13-1

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Page 1: 26363095 Case Study Carnival Cruise Lines Inc a Successful Company Rapid Growth

CASE 13CARNIVAL CORPORATION (1998)

I. CASE ABSTRACT

Carnival Cruise Lines, Inc., was founded by Ted Arison in 1972. From its inauspicious beginning, Carnival became known for fun-filled Caribbean cruises. Ted retired in 1990 as Chairman. His son, Micky Arison, CEO, then became Chairman. Carnival is considered a 'Controlled Foreign Corporation' (CFC), which exempts shipping operations of a corporation from income tax.

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 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 1997 (as of November 30, 1997) reached $2.9 billion with income from operations of $666 million. 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 26% overall. The company’s passenger capacity increased from 17,973 in 1991 to 31,078 in 1997.

The company's principal subsidiaries are: (1) Carnival Cruise Lines, which has 11 ships with a total of 20,332 berths and operates principally in the Caribbean. (2) Holland America Lines, which has 8 ships with a total of 10,302 berths and mainly cruises Alaska in summer and Caribbean during the fall and winter. The 1989 acquisition also included Holland America Westours, largest tour operation in Alaska and Canadian Rockies, Westmark Hotels, 16 hotels in Alaska and the Yukon Territories, and Windstar Sail Cruises, three computer-controlled sailing vessels operating primarily in the Mediterranean and the South Pacific. (3) Seaborne Cruise Lines, a joint venture (50% owned) targeting the luxury market with 2 ships, which can accommodate 200 passengers per ship. (4) Airtours, of which the company purchased a 29.5% interest in 1996, was the world’s largest air-inclusive tour operator. It owned 31 aircraft and 2 cruise ships and operated 32 hotels. (5) Costa Crociere was purchased in 1997 by Carnival and Airtours for $141 million. Considered Europe’s largest cruise line with 7 ships and 7,710 berths. In 1998, Costa signed to build its 8th

ship. (6) Cunard Line, a 50% interest purchased in 1998 and merged with Seaborne.

The industry is characterized by over-capacity, intense competition, and larger new ships. In 1998 Walt Disney added 2 new ships (2,400 passengers per ship). The industry's present problems should intensify in the years to come.

Copyright © 1999 by Thomas L. Wheelen and J. David Hunger. Reprinted by

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our permission for the 7th Editions of (1) Strategic Management and Business Policy and (2) Cases in Strategic Management.

Special Notes: (1) Carnival’s newest ship, Paradise, is smoke-free. There is a $500 fine for smoking and violators must depart the ship at selected ports. (2) This is a Panamanian foreign controlled corporation. (3) Legislation is being proposed to limit the tax exempt status of controlled foreign corporations. This status makes Carnival Lines almost tax exempt, while most of the passengers embarked in U.S. ports.

Decision Date: Mid 1998 1998 Revenues (6 months): $1,219,196,0001998 Net Revenues (6 months): $270,510,000

II. CASE ISSUES AND SUBJECTS

Cruise IndustryInternational Business

Entertainment/Hospitality IndustryDifferentiation Strategy

Strategy Formulation and Implementation

Growth Strategy

Marketing StrategiesOperations StrategiesEconomies of Scale

Concentration vs. Competitive AdvantageDiversification

Distinctive CompetenceMarket SegmentationControlled Foreign Corporation

Core Competence Horizontal GrowthSocioCultural Forces -

DemographicsTravel AgentsCorporate Governance

Industry Analysis Controlled Foreign Corporation (CFC)Strategic GroupsBarriers to EntryThreat of SubstitutesOvercapacity

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (see Figure 1.5 on pages 20 and 21)

Strategy FormulationStrategy

ImplementationEvaluation &

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O O O O O O O O O O O = Emphasized in Case X = Covered in Case

IV. CASE OBJECTIVES

1. To illustrate a successful company undergoing rapid growth through acquisitions.

2. To discuss the impact of cruise industry trends on Carnival Lines.

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3. To discuss the impact of long-term debt and equity financing strategies on company growth.

4. To discuss the marketing strategies for a multi-segmented company.

5. To evaluate Carnival Lines' horizontal growth strategy.

6. To discuss Carnival Lines' competitors. Also, to learn whether Carnival Lines has a competitive advantage.

7. To evaluate Carnival Lines' strategic management and its performance over the past five years.

8. To discuss the impact that the larger and larger new-construction ships will have on the ports-of-call.

• We were told that about 20 ships were in St. Thomas, W.I., on the same day. The island and shopping area could not handle this number of visitors. Cruise ships were forced to anchor miles out from the city harbor. Many residents want restrictions on number of visitors on a given day. The island’s infrastructure cannot handle large number of visitors from ships. This did not include ships with over 1,000+ berths.

9. To discuss the tax advantages, if any, of being a Controlled Foreign Corporation (CFC) under the Internal Revenue Code.

10. To discuss whether Carnival has a distinctive competency or core competencies.

V. SUGGESTED CLASSROOM APPROACHES TO THE CASE

1. This is an excellent case for a team presentation. It is a high interest case with the students.

2. This is an excellent case for an exam or written case analysis.

3. This is an excellent case for an individual or team strategic audit.

4. This is a good case for instructor-led discussion.

5. SUGGESTION FOR DAILY CLASS PARTICIPATION

We have found it is difficult to get quality daily participation from our students. We suggest the following:

1. Have the class members prepare-individually or as a team-(a) EFAS, IFAS, and SFAS or (b) just a SFAS for the assigned case.

*We have 1 or 2 individual students of a team bring their EFAS, IFAS, and SFAS or just their SFAS on a transparency. We have found in this 75 minute class that SFAS alone as a transparency works most effectively.

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2. We compare the students’ work with that of the team or individual students making the presentation to the class.

*We also discuss how the WEIGHTS and RATING were developed and the Weighted Score for the case under discussion.

3. We ask each student at the beginning of the class to write down his/her Total Weighted Score for the case under discussion and pass it in.

*Can use the results to call on students whose scores seem to be out of line with the case.

**It allows for a discussion of the Total Weighted Score as his/her overall evaluation of how the management of the company is managing the company’s internal and external environment.

***We ask the students whether they would buy stock in this company-then the Total Weighted Score seems to have real meaning.

VI. DISCUSSION QUESTIONS

1. What are the strengths and weaknesses of Carnival Lines?

2. What are the opportunities and threats facing Carnival Lines?

3. What are the strategic factors facing Carnival Lines?

4. Does Carnival have any core competencies? If 'yes', what are they?

5. Does Carnival have a distinctive competency? If 'yes', what is it?

6. What trends are emerging in the cruise industry?

7. What is Carnival's principal marketing strategy targeted to middle-class clients?

8. How important are travel agents to Carnival's business?

9. If you could fly to a Caribbean island and spend 7 days, or take a 7-day Caribbean cruise, which one would you select and why?

10. How do you evaluate Carnival's targeting of each of its lines to a specific target market.

11. How do you evaluate Carnival's marketing theme of "A Fun Ship"?

12. How would you evaluate Carnival's strategic management?

13. Why are Carnival Lines' ships foreign-registered and not U.S.-registered?

• What are the advantages of being a Controlled Foreign

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Corporation (CFC)?

14. How can Carnival maintain low costs for a high level of service?

15. What impact do rising oil costs have upon the company?

• Students have a tendency to forget the air fare, which is 25% of expenses. So, as air tickets go up, Carnival management has two choices - absorb the increase or raise prices on the package deal.

VII. CASE AUTHORS’ TEACHING NOTE - by Michael J. Keeffe, John K. Ross, III and Bill Jo Middlebrook*

A. Case Abstract

Carnival Cruise Lines, Inc., was founded by Ted Arison in 1972. From its inauspicious beginning, Carnival has become known for fun-filled Caribbean cruises. Much of its success is attributed to its marketing program directed toward the young, fun-seeking, first-time cruiser. One important aspect of the market program built upon the ship as the destination rather than some particular port of call.

The primary business segments of Carnival are Carnival Cruise Lines, Holland America Lines & Holland America Westours, a joint venture to operate Seaborne Cruise Line in the luxury segment, and a new joint venture with Hyundai Marine to enter the Asian market (in September 1997, the Company announced that it was dissolving its Asian cruise joint venture with Hyundai Merchant Marine and would repurchase the cruise ship Tropicale from the joint venture). The company has disposed of the Crystal Palace Resort and Casino which did not prove profitable. Carnival is pursuing an aggressive growth strategy by: 1) acquisition/joint ventures and horizontal integration; 2) new ship building; and 3) extensive marketing. Problem areas to be addressed include growth in a consolidating and maturing industry and appropriate marketing strategies to reach both first-time and experienced cruisers. Specific issues include potential industry over-capacity and containing costs while maintaining current service levels.

Case Objectives

This was presented earlier in Section IV - Case Objectives.

B. Suggested Classroom Approaches to the Case

This was presented in Section V - Suggested Classroom Approaches to the Case.

C. Discussion Questions

The case authors provided 10 questions. These are presented earlier in SECTION VI - DISCUSSION QUESTIONS.

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E. STUDENT PAPER

A full student paper on the case update was not available at the time of compiling the Teaching Note. However, several student exercises used during case development are excerpted here to provide a student perspective on the company.

__________________________*Reprinted by permission of the case authors.

a. Mission . Carnival Cruise Lines, Inc. has the implied mission of sustaining an industry leadership position as a market-oriented firm in the cruise and leisure industry. Leadership means providing the best all-inclusive cruise vacation to customers in all segments of the market.

b. Strategic Objectives

• To be the leading cruise operator in all segments entered and to maintain the most up-to-date fleet of cruise ships in the world

• To develop new cruise segments and innovative cruise packages to reach a larger number of potential and past cruisers

• Employ sophisticated promotional efforts to achieve a greater awareness by the public concerning the availability and affordability of cruise travel

• Attract the first-time and younger cruisers (Carnival), experienced cruisers (Holland America), upscale cruisers (Seaborne), and cruisers wanting a sailing vacation (Windstar)

• Promote cruises as an alternative to land-based vacations

• Provide a variety of activities as well as ports of call

• Be innovative in all respects of operations of the ship

c. Current Strategy. Corporate strategy at present is one of growth through horizontal integration (Holland America acquisition and Seaborne joint venture), internal development, the pursuit of shipbuilding, and the utilization of aggressive advertising/marketing campaigns. Carnival’s business strategy is essentially one of differentiation in all segments. This 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).

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d. Threat and Opportunity Profile

Threats

1) The potential over-capacity of the cruise-ship industry. Cruise ships are being added faster than demand is growing.

2) Growing concern in some ports-of-call that cruise line expansion should be curtailed.

3) Foreign-registered ships’ inability to transport people between ports in the United States.

4) The possibility that foreign-registered ships will become subject to all standards established by the National Transportation Safety Board, the Center for Disease Control, and other laws enacted by the U.S. Government.

5) Fixed costs, a significant part of the expense of operating a cruise line. Changes in air fare, fuel, labor, and/or shipbuilding costs could affect cruise operators with little advance notice.

6) Fierce competition in the cruise industry due to industry consolidation.

Opportunities

1) The cruising season may be extended by using more ports-of-call in the lower Caribbean and South America.

2) With a historically low dollar, Carnival cruises represent good value for their money for European travelers.

3) The United States’ demographic profile is changing toward an aging population with more discretionary income.

4) Only 5 percent of the potential cruise market has been on a cruise (Boston Consulting Group, 1989).

5) Brand loyalty and loyalty to cruising are extremely high and should result in a large number of repeat customers.

e. Strategic Advantage Profile :

Strengths

1) Carnival is exempt from most taxes in the United States.

2) Carnival is the world’s largest cruise-ship operator.

3) The organization’s marketing plan is innovative and effective.

4) Carnival’s break-even point is the lowest in the industry.

5) Carnival is in the process of increasing its berth capacity

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through new shipbuilding.

6) Additional revenue is generated by on-board activities.

7) Carnival has a presence in most cruise segments and is a leader in those segments.

Weaknesses

1) The National Maritime Union has accused Carnival of exploiting its crews.

2) Repeat passengers place pressure on personnel to develop new itineraries.

3) Many of the company projections for growth in the late 1990s may have overlooked the industry over-capacity problem, and the industry-wide discounting that took place in the late 1980s may have spoiled passengers into expecting continued discounts.

4) Control problems tend to accompany rapid growth situations.

5) The resort and hotel segment of the company (primarily Holland America Westours and Westmark Hotels) is not performing at the same level as the cruise segment(s).

f. Strategic Alternatives

Several alternatives are available to Carnival in their attempt to sustain future growth and profitability.

1) Stability Strategy - Proceed with caution2) Growth Strategy - Continued horizontal growth and

acquisitions3) Retrenchment - Reorganization4) Combination

g. Recommendation

Continue moderate growth in the cruise segments, concentrating primarily on Carnival cruise ships. The firm should also broaden its reach and appeal to the mid-range and luxury segments at a steady, but cautious, pace. The company could also divest itself of the resort and tour business to improve overall corporate performance.

h. Implementation

Marketing analysis and extensive marketing plan.

F. CASE AUTHOR’S SUGGESTED CASE ANALYSIS using SWOT format

a. Mission

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To participate in all segments of the cruise industry. (Comment: Although the mission was not clearly stated, this is the feeling you get when you research the company.)

b. Objective

To continue to be a leader in the cruise industry. (Comment: There were no objectives stated that were quantifiable or tied to a stated time period.)

c. Strategies

To acquire or develop a presence in every segment of the cruise market. To provide maximum entertainment and service while pursuing a low-cost producer strategy.

d. Policies

To accomplish this strategy, Carnival plans to use sophisticated promotional efforts and gain loyalty from former customers by remodeling its ships, varying offered activities, and being innovative in all aspects of ship operations.

e. Strengths

• Carnival Cruise Lines, Inc. is exempt from most taxes in the U.S.

• Carnival is in the process of increasing its holdings of ships and other cruise lines (acquisitions).

• Carnival’s attempt to get men involved in the booking process for cruises appears to have been successful.

• Carnival has been successful in joint promotions with Coca-Cola and Fox Television and has other joint promotions in process.

• The firm has benefited from the innovative leadership of Ted Arison, Micky Arison, and Robert Dickinson over the past 20 years.

• The acquisition of Holland America Lines has strengthened the firm.

• Carnival entered a joint venture to operate Seaborne Cruise Lines.

• Carnival enjoys a large element of repeat business.

f. Weaknesses

• Discounting had to be used to fill berths between 1987-1990 while capacity was steadily increased. Customers might have learned to expect discounts.

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• Carnival’s financial picture seems to fluctuate due to its aggressive growth strategy.

• Stock issues are limited in the United States because of the potential shifting ownership. Carnival thereby loses a preferred tax advantage.

• High fixed costs relative to other costs could be harmful in recession.

g. Opportunities

• The growing population of elderly has more discretionary income.

• The average length of time spent by families on vacation has decreased.

• Higher demand and an increase in repeat customers suggest the need for new destinations.

• Consolidation of the industry affords the opportunity to diversify into more segments of the market.

h. Threats

• The National Transportation Safety Board and the Center for Disease Control may be able to enforce stricter standards regardless of where ships may be registered.

• Cost of fuel is still a significant cost and another oil crisis would greatly affect income.

• There are 14 major cruise lines vying for vacationing passengers and dozens of smaller lines.

• The League of Women Voters in the Virgin Islands wants to halt the cruise line expansion in the Charlotte Amalie.

• Federal Maritime Law does not permit foreign-registered vessels to transport people between ports in the U.S.

• According to an analyst at Temple, Barker & Slone, Inc., the industry must double its advertising budget in order to keep up with the increase in the supply of cruise ships.

• Carnival has been accused of exploiting its crew.

i. Strategic Alternatives

• Stability - Maintain status quo• Growth - Continue diversification• Retrenchment - Affect a turnaround in resorts and hotels

j. Recommendation

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At the Corporate level: Grow cautiously in all cruise segments.

At the Business level: Continue to pursue cost leadership for Carnival Line and promote all other cruise lines in their segments. Maintain high service levels while containing costs.

k. Implementation

Maintain close control on present corporate strategies and increase efforts at the Business level to concentrate on marketing thrust.

VIII. STUDENT STRATEGIC AUDIT / STUDENT PAPER

I. CURRENT SITUATION

A. Performance

Carnival Corporation is considered the leader and innovator in the cruise industry. Currently it holds a 26% market share of the industry. In 1997, revenues reached almost $2.4 billion and net income was $666 million. Currently they operate at 104-105% of capacity and are focusing on expansion through internally-funded growth. Two new ships scheduled for delivery in 1998. Carnival purchased Cunard Line in 1998.

B. Strategic Posture (implied)

1. MissionTo provide all-inclusive classical cruise packages.

2. Objective• To maintain 26% market share and leadership position in the cruise industry.• To cut variable and fixed costs to maintain a healthy profit margin above 20%.• To grow by acquisitions.

3. Strategies• Strategy of horizontal growth financed through internal

funds.• Concentric diversification via acquisitions.

II. CORPORATE GOVERNANCE

A. Board of Directors

• Although information is not available about most of the board members, we do know that at least two members of top management are also insiders on the Board: Micky Arison (Chairman of the Board) and Howard Frank (Vice Chairman).

• The stock of Carnival Corporation is publicly traded and at least 20% of privately held stock of the Arison family has been sold to fund expansion. Arison probably controls the board.

B. Top Management

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• Members of top management are as follows:

Micky Arison, Chairman, CEO, (Carnival Corporation)

Robert Dickinson, President and COO (Carnival Cruise Lines)

A. Kirk Lanterman, President and CEO (Holland America Lines)

Howard Frank, Vice Chairman and COO (Carnival Corporation)

Gerald Cahill, Senior VP Finance and CFO (Carnival Corporation)

Lowell Zemnick, VP & Treasurer (Carnival Corporation)

Peter T. McHugh, President and COO (Holland America Lines)

Meshulam Zonis, Senior VP of Operations (Carnival Corporation)

• Carnival Corporation is a family tradition passed down from Ted Arison (founder) to his son Micky (current CEO and Chairman). Micky Arison and Bob Dickinson seem to be the main driving force behind strategic decisions in the company.

III. EXTERNAL ENVIRONMENT (EFAS see Exhibit 1)

A. Societal Environment

Sociocultural:• Growth is slowing in the cruise travel industry (2% from 1991 - 1995). It is also estimated that only 5-7% of the North American market has ever taken a cruise.• Two-income families have more disposable income to apply towards vacations.• 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.• Political-Legal: Increased regulations are issued by the Coast Guard, U.S. Department of Health, and Federal Maritime Commission.• Periodic political tensions which occur in cruise areas (such as the Mideast or Mediterranean) causes cruise competition to intensify in safe waters until the tensions cease.

B. Task Environment• Threat of new entrants is low, given the recent rash of cruise line failures, mergers, and buyouts.• The competitive nature of the industry makes it unattractive to enter, and high start-up costs serve as a barrier to entry.• Rivalry between competitors is high, with six major competitors (including Princess and Royal Caribbean Cruise Lines) and eight minor competitors.• With berth capacity increasing, rivalry may grow more

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intense if demand doesn't rebound in 1996.• 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 customers 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.• 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.

IV. INTERNAL ENVIRONMENT (IFAS see Exhibit 2)

A. Corporate Structure• Carnival Corporation serves major market segments through Carnival, Holland America, and Seaborne (joint venture).• 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.

B. Corporate Culture• Carnival Corporation's culture seems to internalize the concept of providing guests with the highest service standards while keeping a firm grip on operating costs.• There is significant corporate pride regarding Carnival's position as the leader and innovator in the cruise industry.

C. Corporate Resources

1. Marketing

• Carnival Corporation's main marketing objective is to hold on to its 26% 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.

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• Carnival Cruise Lines (contemporary) targets young and first-time cruisers with moderately priced packages which include airfare and a variety of shipboard amenities.-- Prices are competitive with those of other similar

cruise and land-based packages. The "Fun Ship" cruise theme 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% higher than Carnival Cruises.-- HAL serves an older, more established clientele.

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 up to 98 days’ duration.

• Windstar Sail Cruises serves a specialty cruise niche with ships that have small capacity (fewer than 150 guests) and can approach smaller, less traveled ports-of-call.

• Carnival Corp. was the first cruise operator to advertise on television.

• Carnival books 99% of its cruises through travel agents and has implemented an incentive program to reward travel agents who suggest a Carnival cruise before other vacations.

2. Finance

• Currently Carnival Corporation's primary financial consideration is the control of costs in order to maintain a healthy profit margin (greater than 20%).

• Another main concern is the current expansion plan funded by internal growth.

• The financial ratios show several areas that need to be addressed in the company.

-- Carnival has very low liquid assets, as evidenced by the low current and quick ratio, and has negative working capital, which may cause creditors to doubt whether Carnival can meet its current obligations.

-- Overall, the liquidity of the company is very poor

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but may be common to the industry since so much money is tied up in the fixed assets portion of the balance sheets.

-- In other areas, Carnival is doing much better with a profit margin of 22%, ROI of 11%, and ROE of 19%.

-- The company isn't overburdened by debt and has two revolving credit agreements for a total of $1 billion, $815 million of which is still available for the refurbishing and building of ships.

• In the past five years the corporation has experienced losses due to the discontinuation of the Fiestamarina Line and two of its hotels.

• Carnival recently purchased $101 million of secured notes issued by Kloster Cruise Lid. (Norwegian Cruise Lines).

• Kloster has been experiencing financial difficulties, and if the company fails, Carnival will be in a good position to claim a portion of Kloster's assets.

• A financial strength of Carnival Corp. is that it is registered as a Controlled Foreign Corporation and thus is exempt from U.S. Federal income taxes at the corporate level.

3. Research and Development

• Carnival relies on R&D on the part of its shipbuilders to produce faster, more fuel efficient, technologically advanced ships.

• 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.

4. Operations

• Main operations consist of the three cruise lines and the auxiliary tours and hotels mentioned in the analysis of marketing.

• The company expects to take delivery of ten new ships (including several "superliners") in the next four years; seven for the Carnival Line, two for the Holland America Line, and one for Windstar. These ships will result in a 20,484 passenger increase over Carnival Corp.'s current capacity and cost $3.3 billion.

• This expansion will enable Carnival to stay competitive with its rivals, who are also expanding, but if future demand remains depressed, the extra capacity could negatively affect future profitability.

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Case 13Carnival Corporation (1998)

• The major strength of Carnival's operations is that they are very efficient; it has the lowest break-even point of any organization in the cruise industry.

• It has 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% of the company's operating expenses, and they can't be reduced in proportion to decreases in passenger loads and revenues.

• Major variable costs as a percent of operating expense are as follows: airfare (25-30%), travel agent fees (10%), and labor (13-15%).

• 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.

5. Human Resource Management

• Cruises are labor-intensive, requiring extensive screening and hiring of employees.

• Employees work on contracts of 3-9 months and are recruited mostly from third-world countries.

• Carnival had employees from 51 nations in 1995.

• 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 cruise employee positions.

6. Information Systems

• Although it is not mentioned in the case, Carnival Corporation's information system is assumed to be quite extensive, in order to record passenger reservations taken from hundreds of travel agents and to orchestrate the daily operations of this large company.

• The information system also appears to give very detailed breakdowns of expenses between cruise divisions and within cost categories.

V. STRATEGIC FACTORS (SFAS see Exhibit 3)

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Case 13Carnival Corporation (1998)

VI. STRATEGIC ALTERNATIVES

1. Stability Strategy - Pause:

• Considering the possibility of decreased demand and the uncertainty of future demand, it may be prudent to delay contracting for any additional ships until it is apparent whether cruise demand will rebound.

Pros: The company wouldn't be tying up capital in additional ships when demand may not merit it.

• This would allow the company to concentrate on refining its current operations and marketing strategy.• It may also lead to an improvement in the liquidity ratios.

Cons: If demand does rebound and Carnival hasn't ordered additional ships, there will be a time lag until it receives new ships.

• 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

• Move more aggressively into the family cruise market segment.

Pros: Taps a new, growing market with fewer competitors than the traditional cruise industry.

• Allows alternate use of ships that aren't being used if future demand remains depressed.

Cons: This strategy requires a new way of thinking to be successful in satisfying family needs.

• In addition, a lower price may be necessary to attract families who are looking for affordable vacations.

• Competitor Disney is a major force in the vacation industry.

• Continue to pursue moderate expansion funded by internal growth.

Pros: This strategy allows Carnival to keep pace with its competitors, and the company's low break-even point puts it at an advantage over competitors who are pursuing a similar expansion plan.

• Pursuing moderate expansion also allows Carnival to maintain its position as the market leader.

• This seems to be the strategy that the company wants to pursue, and management has been successful in

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Case 13Carnival Corporation (1998)

bucking negative industry trends in the past.

Cons: If demand doesn't rebound, the industry may face price wars and deep discounts.

• 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.

4. Recommended Strategy : I recommend that the company continue to pursue its current growth plan.

• This strategy allows Carnival to stay current with its competitors.

• If demand remains depressed in future years, there will still be ample time for Carnival to reassess its corporate strategy as long as they don't delay indefinitely.

VII. IMPLEMENTATION : The 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.

VIII. EVALUATION & CONTROL : 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 is 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 it is in a good position to maintain its leadership position in the industry and continue to be financially successful.

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Case 13Carnival Corporation (1998)

IX. EFAS , IFAS, and SFAS EXHIBITS

Exhibit 1EFAS (External Factor Analysis Summary)

Key External Factors Weight Rating Weighted Score

Comments

OpportunitiesOnly 5-7% of N. American market has cruised

.12 5 .60 Great number of potential customers

More emphasis on family vacations .08 3 .24 Developing market segment

Two-income family - more disposable income

.08 3 .24 Cruises are an option

Changing industry .13 4 .42

ThreatsSlowing growth in the cruise industry

.10 5 .50 2% in 1991-1995

Very competitive industry .20 4 .80 Six major competitors

Demographic changes .08 4 .32 Aging population

Strong economic conditions .15 5 .75

Threat of substitutes .06 3 .18 air, car

TOTAL SCORES

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Case 13Carnival Corporation (1998)

IX. IFAS , EFAS, and SFAS EXHIBITS

Exhibit 2IFAS (Internal Factor Analysis Summary)

Key Internal Factors Weight Rating Weighted Score

Comments

New larger ships .05 4 .20 Future over capacity

104% capacity .10 4 .50 #1

“Fun Ship” cruise theme .05 4 .20 Effective

Clients – only tap 5% .05 4 .20 Hard to get rest

Strong management team .15 5 .75 Best in industry

Marketing/travel agents .12 5 .60 strong team

Corporate culture .10 5 .50 Strong

Acquisitions – concentric diversification

.14 4 .56 Great acquisition

HRM – exploiting employees .05 4 .20 Stay 8 years

Financially strong .10 4 .40 Low B/E and cash for new ships

Market share – 26% .10 5 .50 #1

Healthy profit margins .04 4 .16

TOTAL SCORES

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Case 13Carnival Corporation (1998)

IX. SFAS , EFAS, and IFAS EXHIBITS

Exhibit 3SFAS (Strategic Factor Analysis Summary)

Key Strategic Factors Weight Rating Weighted Score

Duration

S I LComments

Only 5-7% of Americans have taken a cruise

.15 4 .60 X Potential customers

Growing family vacation market segment

.10 3 .30 X Potential customers

Very competitive industry .15 4 .60 X Six competitors

Escalating threat of substitutes

.10 3 .30 X Disney

26% market share .15 5 .75 X Industry leader

Lowest break-even point .15 4 .60 X Efficient

High fixed costs .10 4 .40 X Standardization

Poor liquidity ratios .10 2 .20 X Cash-poor

TOTAL SCORES

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