?Carnival Corporation Growth Strategy Academic Report on Strategic Management by Diana Romanova 100878 Strategy & Communication EHM3. SC-02 December 10, 2012 Abstract The purpose of the report is to discuss the current strategy of the Carnival Corporation, the world leader in the cruise industry. Based on the external and internal situation analysis the new growth strategy is formulated. The recommendations on the strategy implementation and evaluation are provided by terms of the various strategic theories and models.
The projected internationalization strategy may result in the improvement of the financial business situation, by increasing the corporation’s profit margins and shareholder value, and non-financial indicators, for example, brand awareness. Moreover the company can adapt the proposed scenario for entering new markets in the future. 2|Page Table of Contents Abstract …………………………………………………………………………………………………………………….. Introduction ……………………………………………………………………………………………………………….. 4 Situation Analysis ………………………………………………………………………………………………………. 5 Strategic Direction ……………………………………………………………………………………………………… 6 Formulating a strategy ………………………………………………………………………………………………… Strategy implementation ……………………………………………………………………………………………… 9 Monitoring and evaluating strategic performance …………………………………………………………. 10 Conclusions and recommendations……………………………………………………………………………… 12 Works Cited …………………………………………………………………………………………………………….. 13 3|Page Introduction
In 1972 Carnival Cruise Lines (CCL) began operations with the single second-hand ship, now it is a multibillion Corporation, owning 10 leading cruise lines, operating 99 ships and over 90 000 employees are serving the company worldwide. Under the Carnival name operate: Princess Cruises, P&O (UK), P&O (Australia), Holland America, Costa, Ibero, AIDA, Gurnard, Seaborn, and the signature brand Carnival Cruise Lines. Carnival Corporation gradually expanded through mergers and acquisition of various cruise brands which are targeting different demographic segments and geographic markets with the concentration in North America, Europe and Australia.
In 1987 after achieving its goal and becoming “the World’s most popular Cruise Line”, Carnival declared itself public and offered 20% of the common stock which helped to raise $400 million, the sufficient funds for the further growth. The company entered new markets and started to operate in multiple international locations. In my opinion, well represented in various market segments Carnival eliminated possible attacks from the existing competitors and potential new entrants. As a result of the horizontal growth strategy (Hunger J.
D. , 2011), according to the GP Wild reports 2010, the corporation owns the biggest market share of 48% in the cruise industry (Vogel M. , Papathanassis A. , Wolber B. , 2012). Nowadays the company continue expanding externally and internally by aiming to deliver 2 to 3 newly built vessels annually. One of the reasons the company succeeded was the choice of the competitive strategy. CCL has followed cost leadership approach; minimising the costs as much as possible in order to keep the competitive advantage (Cunill, 2006).
It has been done by: ? ? ? ? employment of the international personnel mainly from the developing countries which significantly reduced labour costs registering the fleet in the off-shore zone therefore avoiding tax payments choosing secondary ports of calls and early sales over the luxurious expensive destinations outsourcing low profit departments and services, for example, photo, retail, fitness centres and spa Moreover, in our days large market share allows employing economy of scale and keeping supply costs considerably low; that long with the possession of the diverse brand portfolio is Corporation’s main competitive advantage. 4|Page Further in the report I discuss the possibilities for the future growth of the company; risks and complications. My suggestions are based on the environmental scanning and situation analysis. Finally I make recommendations on the growth strategy implementation in order to maintain leading position in the market. Situation Analysis Cruise Line industry is very complex; it is a combination of tourism, passenger carrier and hotel business, and affected by many external events.
Thus for the macro-environment analysis DEPEST model was used which had shown that changes in the economic, social, demographic and technological environment are influencing the industry the most. The credit crunch strongly affected the industry. Even though USA remains the main market (62. 5% according to the Cruise Market Watch), due to the recession consumers significantly downgraded or cancelled their vacation budgets. However, the opportunity can be found in the economy shift from West to East with the focus on the emerging countries (BRIC).
There is a shift in social values and attitudes towards the environmental and social responsibilities. Technological changes in the industry experience bias towards larger ships and therefore higher costs. The advantage of the large vessels can be seen in greater revenues and economies of scale. Detailed industry analysis is crucial for identifying drivers that force or inhabit market growth. A linking technique of Grundy’s (2004) has been used to identify interdependent factors outside the industry with the competitive forces.
If the industry experience growth in the hospitable external environment, the impact of the 5 forces can be mild. However, in the inhospitable environment more pressure will be caused by the competitive forces. (Grundy, 2006) Five competitive forces analysis by Porter showed that the cruise industry is rather unattractive business with the single favourable position, low power of new entrants; due to the high cost of assets, high market concentration and strict environmental and legal regulations (DEPEST).
The strongest competitive force is the power of rivalry which determines the profitability of the company and strategy formulation (Porter, 2008). Cruise industry operates in the oligopoly market dominated by two large firms; CCL and Royal Caribbean International (RCI), with 48% and 22% market share respectively. They are continuously involved in the battle over the market share by building mega-liners and M&A. 5|Page Bargaining power of buyers is rather strong, and leads to the price competition.
Power of substitutes is stronger in the Caribbean region as there are numerous land based resorts. The power of suppliers is relatively moderate due to the high volume of purchasing. Nevertheless the company depends on the fuel market price; it is one of the major expenses on the balance sheet. For the analysis of the micro-environment, resourced based approach has been applied. The company’s resources for the strategy implementation, effectiveness improvement, and the degree of contribution to the competitive advantage are discussed in terms of VRIO model (Barney & Hesterly, 2010).
Large market share composed of world’s best-known cruise brands with the experienced in the international markets management teams is valuable resource for sustaining competitive advantage. It contributes to a higher barrier for new entrants, and reducing the threat of buyers’ power by operating in 3 major market segments (contemporary, premium, and luxury). The resource is rare due to structured market and hardly imitable as it involves high costs.
To maintain and exploit the resources Carnival Corporation has divisional structure, where strategic decisions are retained on the corporate level and operational are delegated to the divisions/ brand offices. Strategic Direction “Our mission is to take the world on vacation and deliver exceptional experiences through many of the World’s best-known cruise brands that cater to a variety of different geographic regions and lifestyles, all at an outstanding value unrivalled on land or at sea. ” Mission is an organization’s character, identity and reason for existence.
It can be divided into four interrelating parts: purpose, strategy, behaviour standards and values (Campbell & Yeung, 1991). Examining current mission, the purpose can be identified as “take the world on vacation”; strategy – “World’s best-known cruise brands”, where value of the product represents competitive advantage of the firm; behavioural standards – “deliver exceptional experiences”; values – “outstanding value”. Jones & Hill stated that mission should describe an organisation’s business in three dimensions: customers groups, needs and distinctive competences, for satisfying those needs.
Thus customer-oriented mission statement helps to anticipate demand shifts and exploit company’s resources in the changing environment (Jones & Hill, 2010). Carnival Corporation’s mission defines customer groups as “world”, what goes in line with the worldwide operations, however, the company should notice the 6|Page demand shift from North America and Europe to new emerging markets (DEPEST). Needs are clearly defined as need for vacation; and in order to satisfy those needs, the corporation holds brand portfolio with “variety of geographic regions and lifestyles”. We have a clear vision for our future: maintaining a constant focus on providing higher quality vacations at tremendous value to our customers, while keeping an eye on the bottom line and earning superior returns for our shareholders. ” Campbell & Yeung associate vision with the goal; it has to be realistic, credible and attractive for the organization (Campbell & Yeung, 1991). Carnival Corporation’s vision is vague; the organization has achieved market leadership and has no new goal set, therefore the company likely to lose direction. Collins & Porras have more extensive view on the effective vision.
It is a combination of the organisation’s core ideology, which consists of core values and purpose of the company existence, and future envision. The values and the purpose remain fixed while the strategy adapts to the changing environment and sets future directions (Collins & Porras, 1996). The purpose of the company’s existence is stated in the mission. Carnival Corporation core values are “providing outstanding service, building and maintaining trust in the business relationships and pursuing the highest standards of ethical behaviour, by commitment to the guests, each other, the company, shareholders and the World.
Carnival’s vision addresses to the customers (guests) and shareholders but employees (each other) and the World (environment). Thus vision needs to be revised by including missing components. Furthermore future envision has to be formulated; globalization of markets and competition (DEPEST) cause the firm’s need for the expanding internationally and entering emerging markets. Based on all of the above the future vision assumption could be made: “…maintaining a constant focus on providing higher quality vacations at tremendous value to our customers, while taking care of each other and our environment.
Promoting and expanding the Corporation worldwide what contribute to the bottom line and earning superior returns for our shareholders. ” “Core competencies are skills and areas of knowledge that are shared across business units and result from the integration and harmonization of SBU competencies” (Javidan, 1998). According to Prahalad & Hamel, core competencies require collective learning, involvements and cross-SBU integration (Prahalad & Hamel, 1990). Enter new markets and develop new products by providing high quality vacations, can be identified as the Corporation’s core competencies.
These core competencies are supported by the organization’s resources; 7|Page portfolio of the World’s leading cruise lines and large market share (LA2), and contribute to the competitive advantage. Formulating a strategy “Principal goal of the corporate level strategy is to enable a company to sustain or promote its competitive advantage and profitability in its present business and in any new businesses or industries that it enters. ” (Jones & Hill, 2010). Staying in a single-industry area the corporation is able to focus its managerial, financial and functional resources to establish substantial competitive advantage (Jones & Hill, 2010).
Carnival Corporation through the horizontal integration (mergers and acquisitions) has become an undisputed market leader with the 48% market share in the cruising field. The business model of the Corporation can be described from four perspectives: customer value proposition, profit formula, key resources and processes (Johnson, et al. , 2008). The Corporation unites 10 cruise brands and well represented in the different market segments: contemporary, premium and luxury. Also, the brands differ by the choice of generic strategies (Porter, 2008).
For example, Carnival Cruise Line, which is operating in the contemporary market, employs cost leadership generic strategy and Holland America Line – a premium brand, follows differentiation strategy. Thus the corporation has the ability to satisfy needs and create value for different market segments (e. g. price, personal service, customised activities). Moreover, the diverse portfolio increases market power as the company is able “to cross-subsidise one product from the surpluses earned by another” (Johnson, et al. 2005) and large market share enable to reduce costs and apply economy of scale. The key resources (the world known brand portfolio) and processes (divisional organisational structure where the brands are semi-autonomous) capable to deliver value to both, the customers and the company. After the M brands maintained certain degree of independence, did not go through the re-branding process and saved the marketing function for the reason that every line targets different market and geographic segment.
All the above elements can be seen as the critical success factors; the company’s ability to address factors valued by different customer segments and with the support of corporate resources to outperform the rivals (Johnson, et al. , 2005). As one can see Carnival Corporation employs successful business model; however, in the fast growing industry and changing environment, the organization should react to the changes and adjust the business model according to the latest trends in order to sustain market leadership 8|Page osition. The company operates worldwide with the high business concentration in North America and Europe. Taking into the consideration that the organisation’s opportunity for growth in these geographic regions are becoming limited due to market saturation, and economy shifts towards emerging markets (DEPEST), I would recommend expanding globally by entering new markets, particularly South East Asia. It is an attractive region with the continuous growth of the domestic demand and GDP (the World Bank).
The expansion can be done by two scenarios: by acquisition of the Star Cruises (leading cruise operator in Asian market) or forming home base in AP region and repositioning the existing lines. The former requires high cash outflow for the investment, which might put the corporation at risk after the financial subsequence’s of Costa Concordia accident; therefore I suggest assessing the latter. Global expansion will enable opportunity for the company to increase profitability and market share growth (Jones & Hill, 2010). On the other hand the main threat for the Corporation will be lack of the experience operating cruises out of the AP region.
To minimise the threat the corporate office have to be established in Asia, to maintain operations and pursue cruise strategy in this geographic region. Strategy implementation For the successful strategy implementation management cycle has to link strategy and its specific objectives with the operational processes (Kaplan & Norton, 2008). Thus the overall corporate strategy of the company expansion and entering new markets is supported by business strategy of the SBU (single cruise line) and functional strategies, which are linked to the operational activities.
These activities for the strategy execution can be defined and organised by means of the business model that create and deliver value proposition (Richardson, 2008). To gain the competitive advantage on the new markets Carnival Corporation should adopt business model framework which would provide greater value to the customers than offered by the competitors operating in this region. It can be done in three steps: ? the value proposition The cruise business is rather young and immature industry in the South East Asia region.
Even though the cruise lines operate in this geographic region for many years, the region is used as the cruise destination but not the home base for the local market, the services are still targeting consumers from North America and Europe. Moreover the main operator in Asia, 9|Page Star Cruises provide different product with the heavy reliance on gambling services. As the Asian market developing and number of vacationers and travelers increases, Carnival Corporation, the experienced vacation provider, will introduce new valuable product to the market. the value creation and delivery system The corporation VRIO resources (brand portfolio) will enable the company to deliver value to the customers. By repositioning cruise liners of different brands (CCL, Costa, and Princess) the company targets different market segment (contemporary and premium) and will be able to satisfy various customer needs. Furthermore chosen brands can be differentiated by the generic strategies; CCL employs cost leadership strategy, Costa and Princess follow differentiation strategy. value capture Taking into consideration the preferences and cultural differences of Asian consumers, the additional services on board like enlarging casinos, shopping and dining choices may be introduced. That will enable to generate extra revenue thus contribute to the profit margin. In order to deliver the proposed value to the customer and have it translated into action, as it was mentioned above; the corporate office has to be established in Asia region. The main purpose of this is to have access to the up-to-date market information, understand local competitor environment and market particularities.
Moreover to enable effective strategy execution and ability quickly react to the external environmental changes the management team based in Asia has to be designated. Executive staff with the operational experience with the lines going through the reposition has to be appointed and hold accountable for the operational decision making and the firm’s profitability. Well-defined decision rights and excellent information flow are crucial for the successful strategy implementation, evoke motivation and contribute to the effective organizational structure (Neilson, et al. 2008). Monitoring and evaluating strategic performance Strategy execution requires an ongoing monitoring and evaluation process. Management meetings regarding operational activities, progress and barriers to strategy execution, and assessment and adjustment (if necessary) of the strategy itself have to be hold on the regular basis in order to balance short-term operational goals with the long-term strategy objectives (Kaplan & Norton, 2008). 0 | P a g e Operational activities review includes weekly and monthly financial and non-financial key performance indicators (KPI). It is necessary for the assessment of the short-term goals and solution of operational issues. The following can be addressed during the operational meeting: guest satisfaction, occupancy, sales revenue, etc. For the monitoring organizational performance against strategic goal and the strategy review balanced scorecard system developed by Kaplan and Norton can be used.
It goes beyond traditional method of the financial performance measurements, and measures the performance from the additional perspectives: customers, internal business process, learning and growth. The usage of the balanced scorecard enables management to better understand the company real situation and assess financial performance, monitoring capabilities for the future growth and link current actions with the future consequences (Kaplan & Norton, 2007).
The suggestions for the balanced scorecard measures and targets are following: ? ? ? Financial performance: generated revenue increase by N%, costs do not exceed N%, increase shareholder value by N% Customer perspective: maintain occupancy at the N%, increase brand awareness by N%, increase number of the repeat guests by N% Internal business process: increase of the corporative fleet presence in the Asian market by N%, standardise operational processes, improvement of direct marketing, optimisation of the pricing strategy ?
Learning and growth: corporate culture, safety and security procedure, cultural differences and newly hired trainings Furthermore the strategy has to be evaluated and adjusted if necessary on the yearly basis with the corporate headquarters office. That includes the examination of the economics of the existing products and customers, statistical analysis of correlation among strategy performance metrics and consideration of new strategy options (Kaplan & Norton, 2008). ? The economics of the existing product lines and customers segments can be done by examining cost and profitability reports.
It may appear that the different market segment may be more profitable and can be attracted with the substitute cruise brand. ? Statistical analysis should be done to examine if the expansion to the new market positively affected overall corporation profitability and expected ROI. Balance scorecard system should be used to perform such analysis. 11 | P a g e ? New strategy options can emerge based on the continuous evaluation process because of the changing internal and external environment. Conclusions and recommendations
Carnival Corporation is a good example of the successfully employed growth strategy via the horizontal integration through the mergers and acquisition of the competing brands. However, due to current globalization of markets, to react timely on the rapidly changing environment the best ways to continue corporate growth is by employing the strategy of the internationalization and entering new markets. Possession of the valuable corporate resources is favorable for the new strategy implementation and aligns the corporate activities with its capabilities.
There is a certain risk in the implementation of the internationalization strategy as the entry to new markets cannot guarantee profitability. Therefore the corporative office must continuously monitor and evaluate business performance. By entering South East Asia and establishing strategic hub in the region the Corporation wins pioneer position on the market as the cruise industry is not yet well presented in this geographic region. Moreover I recommend entering other emerging markets (Brazil and Russia) by similar scenario with the adaption to the regional particularities.
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