In order to grasp this understanding fully, this report will look into Carnival’s background and what problems are plaguing not only this company, but also others in the industry. The market structure of the organization is provided in detail, along with graphical information in regards to the breakdown of racket share. These graphical images show that Carnival currently holds the highest market share in the cruise industry.
To detail fully Carnival’s current state, a SOOT analysis is performed. This analysis demonstrates the strengths and weaknesses facing the organizations internal environment, as well as threats and opportunities from external factors. Additionally, current pricing strategies are listed in order to further reader’s knowledge about Carnival’s economic principles. Based on the findings of the SOOT analysis, there are major weaknesses affecting Carnival’s bottom line.
Recommendations discussed include: * Implementing policies and procedures to immediately deal with ship mishaps, while putting procedures in place to make safety a priority * Continuing its current pricing strategy with the addition of discounts for first time cruisers * Discontinue manufacturing of new ships and focus instead on renovating older ships and making them more safety oriented while adding the extra amenities cruise ship passengers look for Carnival Corporation , the world’s largest cruise line company, offers consumers a resort style vacation on the open seas.
Millions of passengers each year embark on actions that offer the opportunity to venture to newfound locations and foreign destinations, while enjoying onboard amenities such as hotel type accommodations, various free restaurants, free live shows, and Just time to relax and enjoy ones vacation. The purpose of this paper is to provide an economic analysis on Carnival and provide recommendations that Carnival could heed to in order to ensure future economic growth. Company Background Carnival Corporation’s (n. . ) mission “is to take the world on vacation and deliver exceptional experiences through many of the world’s best-known cruise brands that eater to a variety of different geographic regions and lifestyles, all at an outstanding value unrivaled on land or at sea”. Throughout the years, Carnival has abided by this statement, pushing forward to ensure that their passengers enjoy themselves from the beginning of their cruise to the end of their cruise on a continual basis.
History 1972, Theodore (Ted) Orison ( an Israeli businessperson, made his dream a reality and purchased a converted ocean liner with the mission of establishing “a vacation experience once reserved for the very rich accessible to the average person” (Carnival Cruise Lines, 2013). During the same year, the maiden gage of the TTS Marci Grass took place leaving from the Port of Miami. However, the organization ran into trouble when the ship ran aground on a sandbar right outside the port. Mr.. Orison did not let this hurdle stop his vision, and future voyages of the TTS Marci Grass went on without a hitch.
For the first two years, the company struggled to survive, however, Mr.. Orison’s determination to keep the company afloat became more focused, and in 1974, he opted to split apart from the partnership he had created and became the sole owner of the cruise line. From that point forward, the organization prospered, and after 10 ears of utilizing secondhand ships, Carnival introduced the Tropical to the public. A brand new cruise ship erected by the organization itself, the Tropical was the first new ships introduced to the cruise ship industry in many years.
It marked “the beginning of an industry-wide multi-billion dollar shipbuilding boom” (Carnival, n. D. ), with Carnival introducing 22 brand new “Fun Ships” into service over the next 30 years. The latest ship, Carnival Breeze, made its debut in spring of 2012, and has the capacity to entertain 3,690 passengers with its 1,386 member crew on its current usages out of Miami to the Caribbean and Bahamas. In addition to its own brand, Carnival has also acquired several smaller cruise lines.
Currently, its brand portfolio consists of Carnival, Holland America, Princess, and Seaboard in North America, AID cruises in Germany, Costa Cruises out of Southern Europe, P&O Cruises and Canard from United Kingdom, Brucellosis in Spain, and P&O cruises out of Australia. Carnival alone offers its passengers inclusive vacations to various destinations, including the Caribbean, Bahamas, Mexican Riviera, Hawaii, Alaska, Panama Canal, Tahiti, Mediterranean Islands, and numerous other exotic locations from more the 20 North American ports.
Carnival in the News Over the last two years, Carnival Corporation has had several unfortunate incidents that have brought the organization under fire. The most serious incident occurred January 13, 2012 when the Costa Concordia, part of Costa Cruises, a division of Carnival, hit a rocky patch Just off the coast of Igloo, a Tuscan island. In a matter of hours, the ship capsized, leaving its 3,229 passengers and a crew of 1,023 fighting for their lives. In the end, 32 passengers and crew perished in the wreck, while 64 additional were injured. Currently, there are several lawsuits against Costa Cruises and Carnival in regards to this tragedy.
In February 2013, Carnival Triumph was off the coast of Mexico when a fire in the engine room left it helpless and without power at sea. For five days, passengers lived in hazardous conditions including no electricity and nonworking toilets. While Carnival executives did everything they could to help those on board, including compensating all passengers on board with $500, a plane ticket home, full refund for their trip and most of their expenses while onboard, as well as a credit for another raise, several lawsuits against the organization have begun to hit the organizations doors.
Two more Carnival ships, the Dream and the Legend had mechanical problems soon after the Triumph ordeal causing blow after blow against the company. With all of the recent troubling news in regards to Carnival and its parent ships, the question everyone is asking is what is on tap for Carnival’s economic and financial future. Will Carnival be able to survive the fall outs from the incidents and maintain their standing in the cruise ship industry or will the organization drop from their tanning and lose economic advantage over other cruise companies that are not having the same troubles?
Market Structure All organizations fall under one of four basic market structures within the economic environment. These market structures include perfect competition, monopolistic competition, oligopoly, and monopoly. In a perfectly competitive market, firms compete against a large number of competitors while selling an undifferentiated product. Firms in a monopolistic competitive market structure also compete against a large number of competitors, but sell differentiated products.
Oligopolies compete against a small number of other firms, while their services or products are either differentiated or undifferentiated. Monopolistic firms have no close competition, selling undifferentiated products that are unique to only that company with no close substitutes. Carnival – An oligopoly Carnival and its competitors operate in an oligopoly market structure. This market structure is “characterized by competition among a small number of large firms that have market power, but that must take their rivals actions into account when developing their own competitive strategies” (Burnham, 2010, p. 26). While there are several cruise companies in operation today, only two have strong market power. Product differentiation is high, with different cruise lines offering various degrees and levels of service. Numerous barriers to entry exist, strong interdependency amongst the firms occurs and prevalent advertising campaigns is relevant. This is detailed further in the below paragraphs. Competition. Within the cruise line industry, there are a large number of firms competing against one another.
These include Carnival and its subsidiaries, Royal Caribbean and its subsidiaries, Norwegian, MS Cruises, and Disney. However, as shown in the pie chart below, Carnival dominates the market, holding 54. 5% market share against the other four competitors listed above in regards to share of worldwide passengers. Its closest rival, Royal Caribbean maintains 26. 3% market share while Norwegian holds 8. 6%, MS Cruises holds 7. 9% and Disney holds a mere 2. 8% (Cruise Market Watch, 2012. Cruise Market Watch (2012) Product Differentiation. While the cruise industry has some degree of undifferentiated products, including such products such as amenities, excursions, and ships, which can all be mimicked y other cruise lines, Carnival still has a moderate level of product differentiation from its rivals. This includes pricing levels, quality levels, and various demographic and segmentation that allow each ship to offer some degree of product differentiation to its customers. Barriers to Entry.
The cruise industry, like other oligopolies, has numerous barriers affecting the entry to newcomers. One to the largest barriers is that to capital requirements Broodier (2013) states, “it costs $500 million too billion to build a new cruise ship, which makes this a very expensive business to break into”. While this amount alone is hefty, companies must also factor in the costs of marketing, port fees, crew and labor charges, and a multitude of other costs. A second barrier to entry revolves around the concept of intangible assets and most importantly, brand recognition.
As pointed out earlier, the cruise industry currently has two main leaders, Carnival and Royal Caribbean, with several small companies holding very small percentages of passenger business. This means that consumers already see these two cruise lines offering unique services, which therefore will make it hard and extremely expensive or new startup lines to educate customers about their brand. Additionally customer relationships and specialized knowledge is also imperative in this industry, which is not easily acquired.
Thirdly, since Carnival and Royal Caribbean hold the majority of market shares, both are capable of achieving economies of scale. Economies of scale is defined as “achieving lower unit costs of production by adopting a larger scale of production, represented by the downward sloping portion of a long-run average cost curve” (Burnham, 2010, p. 1 50), which is true since both companies are able to average their fixed costs across their array of fleets and larger ships. Finally, government barriers also exist in this market.
Cruise lines, including Carnival, are government regulated and licensed. Each must be registered to a specific country, pass safety inspections, and continually meet government expectations to keep running. While not a large barrier to entry, it typically causes smaller organizations to steer clear from introducing themselves to the market. Oligopoly Model – Uncooperative. Since Carnival must compete against several other cruise lines, management asses their decisions on the assumption “that their rivals will pursue strategies that inflict maximum damage” (Burnham, 2010, p. 31) to their organizations. In order to respond to these threats, management must strategies and determine the best course of action to take. The non-collusive kinked-demand curve model is one such model, where Carnival prices their products independent from its rivals (Carnival typically has the lowest prices in the industry), but will react if its competitors lowers or changes their prices. Market Share Analysis As discussed early, Carnival currently maintains the largest market share of the raise line industry at 54. 5%, twice that of its closest rival Royal Caribbean.
One index widely used to measure market power, is that of the Herbicidal-Hiroshima Index (HI), which is defined “as the sum of the squares of the market share of each firm in an industry. Taking the largest cruise lines as introduced above; Carnival, Royal Caribbean, Norwegian, MS Cruises, and Disney, below one can see the measure of market power of the cruise industry. Company I Market Share I HI I carnival 54. 5% | 2970. 25 | Royal Caribbean | 26. 3% | 691. 69 | Norwegian | 8. 6% | 73. 96 | MS cruises | 7. 9% | 62. 41 | Disney | 2. % | 7. 84 | Since the HI for the cruise industry show above is 3806. 5, this market is highly concentrated. This means that if Carnival were to try to merge with other organizations and the merger causes the HI to increase by more than 100 points, typically, the Justice Department would step in and challenge the merger because of its anticompetitive basis. Pricing Strategies No matter what industry an organization operates or market structure it falls under; all businesses owners have the same goal. This goal is to maximize their profits in order to remain successful. In order to do this, managers must determine hat pricing strategies are necessary in order to reach this goal and Carnival is no exception.
Since taking a cruise is typically a luxury for most households, demand is highly elastic. This means that if prices increase or income decreases, consumers are likely to determine that cruising is not necessary, which in turn causes the cruise line to lose revenue. Therefore, management utilizes pricing strategies such as price discrimination, or “the setting of different prices to be charged to different consumers or in different markets for the same good or services” (“price discrimination”, n. D. ). For Carnival, the two degrees of pricing strategies utilized are second-degree and third degree price discrimination.
When promoting its cruise packages, Carnival quotes its customers pricing based on double occupancy for each cabin. For those individuals who are planning to travel alone, the cost of the room increases. By adding one, two, or three more individuals to the same room, the cost of the room decreases, and the last three individuals cost less. The reason for this is simple, if only one person stays in a room that can hold two or more individuals; the organization is missing profits it could earn from the second or more passengers.
This is a form of second-degree price discrimination. The other form of price discrimination utilized by Carnival is third-degree price discrimination. Carnival offers discounts to various groups of individuals. These discounts include ARP, previous cruiser, residency, military, and several others. For businesses, return customers are a necessity in order to operate effectively and therefore profits are maximized. This is true for Carnival where past guests make up the majority of weekly cruise sailings.
SOOT ANALYSIS One tool that management can utilize in order to analyze their organization and he environment in which it operates is a SOOT analysis, or the internal strengths and weaknesses, and the external opportunities and threats facing the organization. For Carnival, which is currently going through a rough time, this analysis can help management understand each area and determine the best strategies for the organization to remain profitable. Strengths * Over the years, Carnival has continually grown into one of the world’s largest cruise lines.
With its wide array of brand names, Carnival is capable of providing vacation services to each price market, including budget minded, contemporary, and luxury. Due to its large fleet and distribution of homerooms, Carnival has tremendous power over the cruise ship industry, providing it with cost advantages and economies to scale, which allows it to introduce new projects, acquire smaller lines, and negotiate lower production costs with ship manufacturers. * Strong marketing campaigns allow Carnival to get their name and brand out to homes worldwide both through broadcast media and through print. Strong profitability over the last five years has allowed Carnival to continue to increase its fleet, as well as renovate their older ships in order to continually change to the newest trends. Weaknesses * Within the last several years, Carnival’s safety record has been less than stellar. News media has greatly advertised all of the recent mishaps Carnival has faced within the last two years, causing many to wonder if Carnival is safe for travel. * Since the majority of revenue Carnival receives is from U. S. Customers (nearly 52%), any downturn in the U. S. Economy can have an extremely high impact of the organization. * Last year, net income decreased drastically, which could possibly indicate that consumers are questioning Carnival’s practices. * Fuel prices continue o rise, causing Carnival to pass on these increases to customers. Opportunities * Carnival’s demographics continue to grow at a great pace. With most cruise travelers 65 and older making up a large number of cruise travelers, Carnival is poised to increase revenues from the aging population and should implement discounts and other offerings to this group of individuals. The growth of the cruise ship industry has been steady year after year, but remains lower than other forms of vacations. Carnival has the opportunity to continue pushing into other locations while marketing their product to a wider array of consumers. Customers are looking for greater amenities and offerings at sea. Since Carnival has been renovating their older ships, they can take advantage of this time to introduce some of the more widely based consumer desires to make the ship more appealing.
Threats * Continued negative publicity through news media services over safety issues could continue to cause Carnival’s profits to decrease. This negative publicity not only hurts Carnival in the long run, it also has a negative effect on the industry as a whole. * Continued economic turmoil around the world can cause individuals to stay at mom rather than take vacations. * Environmentalists have been actively going after Carnival and its rivals in regards to pollution of water. If the government intervenes and laws become stricter, it will be more costly for cruise ships to operate efficiently.
Strategic Recommendations In order to remain profitable and renew consumer loyalty, the management team at Carnival must take into account the various issues that have arisen over the last couple of years determine the reasoning for these issues, and immediately put policies in place to ensure that the issues do not happen in the future. Based on the negative publicity from news media, the first priority of the organization should be passenger safety and implementing policies and procedures that will greatly reduce incidents such as what occurred on the Carnival Triumph.
In regards to its pricing strategies, Carnival has a great policy in place. However, in the future, management might want to look into offering a discount to first time cruise passengers which in turn, could cause the organization to branch out to those travelers who would like to cruise, but still feel that cruising is Just a little too expensive. From experience, first time cruise passengers usually debark the ship thinking about where they will head out on their next cruise.
This increases profitability and cruise recognition for Carnival, which could decrease the negativity surrounding recent events. One of the major areas where Carnival management might want to look and strategies further is the introduction and manufacturing of new ships. Carnival currently has the most ships at sea, most of which have recently been introduced. While this might be nice for travelers that like to cruise on newer ships, from a long- UN economic and financial point of view, it might Just be too much.