Strategic Finance For Manager

Carnival Corporation appears to have a vertical corporate structure at the parent company. However, a number of the Board members and officers also hold management positions at Carnival Corporation’s subsidiaries. The decision making process is centralized at the corporate level and then disseminated to the subsidiary level. This is because executives of the subsidiaries are also executives, and/or board members, at Carnival Corporation.

It appears that this structure is well understood by all those within the company and appears to work quite well as evidenced by the growth rates they have enjoyed, their high profit margins, and their number one standing in their particular industry. Corporate Culture The corporate culture seems to be well ingrained in all of its employees. As stated in its mission statement they want to offer unrivaled cruise vacations, be the number one brand, and give exceptional value to all of the market segments they service.

They have to be doing exactly that to have the brand loyalty and profit margins they enjoy. They were the first cruise line to use multimedia marketing. This was an outstanding idea that gave them a great advantage over the competition. However, the competition has realized what this type of marketing has done for Carnival, and has jumped on board using the same type of marketing. After a while, those that can spend the same amounts as Carnival does will gain back some of the market share that Carnival gained by being the first.

Carnival has also used travel agencies to assist in marketing their product by giving them nice incentives to sell the Carnival brand. However, with costs increasing and their trying to maintain their profit margins, Carnival has cut those incentives. This will certainly have an effect on their revenues. By looking at some of the trends in Figure 2, we can see that Carnival Corporation has done rather well from 1993 through 1997; years that complete financial data is available.

They have steadily increased their net profit margin and return on investment while maintaining their return on equity. Their net profit margin has increased from 20. 4% in 1993 to 27. 2% in 1997. It appears that this trend has occurred because they have been able to create economies of scale, which decreases costs. Their return on investment has increased from 10. 2% to 12. 3%, once again due to attaining economies of scale. However, in 1998 they have decreased substantially.

This could be because the data available for this year is only for the first six months of the fiscal year and it may change substantially after the full years data is available because of the seasonal surges in cruises. There is one area in the company’s finances that should be of concern; their liquidity ratios are very low. Their current ratio has averaged around . 43. Their quick ratio has held steady at about . 36 between 1993 through 1997. It has dropped to . 25 in 1998 for the period ending May 31st.

This means that they cannot cover their short obligations from current assets minus inventories. This is a terrible ratio. Finally, their cash ratio went from a low of . 09 in 1995, to a high of . 18 in 1997, and has dropped back down to . 10 in 1998. This company keeps very little cash on hand for any possible emergencies that may occur. By looking at Figure 3, we can see that the current and quick ratios dropped from 1993 to 1994 and then held steady until 1998 when they dropped even lower. The cash ratio held steady from 1993 to 1995, then increased substantially (doubled) from 1995 to 1997.

However, in 1998 it dropped back down to pre 1995 levels. The drop in these ratios in 1998 should be of some concern to Carnival Corporation’s executives. Carnival Corporation believes that the industry is comprised of three primary segments each having different demographics, passenger characteristics, and growth requirements. They service those segments by having various subsidiary cruise lines that focus on those particular characteristics of the segment. Carnival Corporation’s business model is based on the profit center concept.

They also have subsidiaries that include air tours and hotels that work in concert with some of their vacation packages. This shows some vertical integration on Carnival’s behalf. Carnival Corporation’s operations and logistics are congruent with their stated mission. It appears that they have all areas aligned with their mission, objectives, and goals, as evidenced by their number one standing in the industry. In addition, Carnival Cruise Lines has strong brand recognition within the contemporary segment. At the management level, the company is strong.

All executives and managers have experience in the industry, or have come from industries, that can help them to understand the obstacles to overcome in order to reach Carnival Corporation’s goals. Their strategy of keeping shipboard labor costs low by hiring employees from countries that have a low per capita income works well for them. By paying these employees well relative to what others in their countries earn keeps them happy. However, Carnival needs to keep in mind that unions will try to influence these employees by saying that if they unionize they could make much more.

Carnival Corporation needs to make sure these employees are happy to the extent that they reject the union’s proposals. Carnival Corporation has a very strong management team with experience in the right fields. Their marketing plan is well defined. They also have brand name recognition with their Carnival Cruise Line subsidiary. They have had excellent growth rates in the past and high profit margins. Their liquidity ratios should be of some concern unless they have a good line of credit with which they can cover the short-term liabilities in case of emergencies.

(I believe that the liquidity ratios are low because they finance most expansion using profits rather than accruing debt and that they have a line of credit in case of emergencies). Their strategy for keeping labor costs low works very well at this time. Unless the employees unionize, their labor costs should remain low. They need to make some deals to market their product with those companies that offer online vacation services. They may also want to start an in-house web based system of product sales.