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 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

13-1
 Case 13
Carnival Corporation (1998)

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): $1,219,196,000

1998 Net Revenues (6 months): $270,510,000

II. CASE ISSUES AND SUBJECTS

Cruise Industry Entertainment/Hospitality Industry

International Business Differentiation Strategy
Strategy Formulation and Marketing Strategies
Implementation Operations Strategies
Growth Strategy Economies of Scale
Concentration vs. Competitive Advantage
Diversification Market Segmentation
Distinctive Competence Controlled Foreign Corporation
Core Competence Horizontal Growth
SocioCultural Forces - Travel Agents
Demographics Corporate Governance
Industry Analysis Controlled Foreign Corporation (CFC)
Strategic Groups
Barriers to Entry
Threat of Substitutes
Overcapacity

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

(see Figure 1.5 on pages 20 and 21)
Strategy Evaluation &
Strategy Formulation
Implementation Control
Review MBO
Performance

Governance

Alternatives
Corporate

& Mission
Strategic

Strategic

Strategic
External
Posture

Internal
Factors

Factors

Factors

1A 1B 2 3 4 5A 5B 6 7 8

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.

13-2
 Case 13
Carnival Corporation (1998)

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.

13-3
 Case 13
Carnival Corporation (1998)

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

13-4
 Case 13
Carnival Corporation (1998)

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.

13-5
 Case 13
Carnival Corporation (1998)

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).

13-6
 Case 13
Carnival Corporation (1998)

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

13-7
 Case 13
Carnival Corporation (1998)

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 caution

2) Growth Strategy - Continued horizontal growth and
acquisitions
3) Retrenchment - Reorganization
4) 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

13-8
 Case 13
Carnival Corporation (1998)

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.

13-9
 Case 13
Carnival Corporation (1998)

• 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

13-10
 Case 13
Carnival Corporation (1998)

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. Mission
To 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

13-11
 Case 13
Carnival Corporation (1998)

• 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

13-12
 Case 13
Carnival Corporation (1998)

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.

13-13
 Case 13
Carnival Corporation (1998)

• 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

13-14
 Case 13
Carnival Corporation (1998)

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.

13-15
 Case 13
Carnival 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)

13-16
 Case 13
Carnival 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

13-17
 Case 13
Carnival 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.

13-18
 Case 13
Carnival Corporation (1998)

IX. EFAS, IFAS, and SFAS EXHIBITS

Exhibit 1
EFAS (External Factor Analysis Summary)

Key External Factors Weight Rating Weighted Comments

Score
Opportunities
Only 5-7% of N. American market .12 5 .60 Great number of potential
has cruised customers

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

Two-income family - more .08 3 .24 Cruises are an option

disposable income

Changing industry .13 4 .42

Threats
Slowing growth in the cruise .10 5 .50 2% in 1991-1995
industry

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

13-19
 Case 13
Carnival Corporation (1998)

IX. IFAS, EFAS, and SFAS EXHIBITS

Exhibit 2
IFAS (Internal Factor Analysis Summary)

Key Internal Factors Weight Rating Weighted Comments

Score

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 .14 4 .56 Great acquisition

diversification

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

13-20
 Case 13
Carnival Corporation (1998)

IX. SFAS, EFAS, and IFAS EXHIBITS

Exhibit 3
SFAS (Strategic Factor Analysis Summary)
Duration
Key Strategic Factors Weight Rating Weighted Comments
Score S I L
Only 5-7% of Americans .15 4 .60 X Potential
have taken a cruise customers

Growing family vacation .10 3 .30 X Potential

market segment customers

Very competitive industry .15 4 .60 X Six competitors

Escalating threat of .10 3 .30 X Disney

substitutes

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

13-21