Company Introduction and Overview
Carnival Corporation & plc (founded in 1972) is the largest leisure company in the world, which provides a variety of travel and entertainment services. Importantly, the company’s portfolio encompasses several cruise line brands (e.g., Holland America Line, AIDA Cruises in Rostock, Costa Cruises in Genoa, and others), which allows Carnival to extend its operations to different locations and attract new customers. The current strategic outlook for the company (2012 and beyond) is projected as favorable, with Carnival gaining popularity not only in North American but also in European and Australian markets.
Over the last several decades, there has been a dramatic increase in demand for cruise vacations due to the development of ships designed specifically for cruise vacations. Since the modern cruise liners are significantly different from those developed earlier and therefore include all amenities possible for comfortable travel, customers have started to be more accepting and willing to travel by sea. Also, the past misconceptions about liners being harmful to oceans or causing seasickness have been eliminated with computer-controlled systems of stabilization, recycling capabilities, and an entire set of entertainment services to keep travelers occupied. In this paper, Carnival’s assessment of the external and internal environment will be conducted through the use of tools such as Swot analysis, Porter’s Five Forces, and Capital Asset Pricing Model.
SWOT Analysis
A SWOT analysis is a widely used tool for strategic planning that business owners use for the identification of a company’s strengths, weaknesses, threats, and opportunities. Not only this tool is used for developing a successful marketing plan but also for making decisions about overall strategizing.
Strengths
The key strength of Carnival Corporation & plc is that the company is the largest cruise service in the world, operating eleven cruise brands in North America, Europe, Australia, and Asia (EAA). Carnival operates 59 cruise ships in North America and 98 in EAA. Such a demographic presence of the company leads to the growing popularity of cruise travel as a vacation option, especially with regards to the company’s reputation as the leading service provider in the sphere. Importantly, the diversification of services based on market demands is very vast, which means that different cruises can provide both budget-friendly and luxurious services to customers.
Carnival’s financial stability represents another strength for capturing the market even further. In 2010, the company’s operating income was $2,154 million and continues growing. Due to the great operational capabilities of the company, Carnival can afford to continuously invest in increasing the number of ships, extending services, and hiring new employees.
Weaknesses
The key weakness of Carnival Corporation & plc is associated with the company’s direct orientation in the needs of the North American market; this means that profit declines or increases are always predominantly linked to the fluctuating demands in that market. Also, the direct dependence on American consumers causes the company to tie its profitability to the value of a US dollar, which is less than UK’s or Germany’s currency.
When it comes to profitability, Carnival Corporation & plc can still experience difficulties in maintaining increasing profitability trends. Even though the company can boast of lavish operating incomes, they can rise and drop each year, leading to significant fluctuations that can limit Carnival’s financial stability. Importantly, a stable income is necessary for paying for the construction of new ships.
Opportunities
The company’s global coverage presents massive opportunities for extending to new destinations in Europe and Asia. Also, the rising capacity of cruise liners is likely to produce heavy profits in case of a successful advertising campaign. Apart from Europe and West Asia, Carnival is also capable of extending its Chinese customer base due to the strengthening of the country’s economic stability and the interest of customers to explore new travel opportunities.
Threats
Direct external threats to ships are of particular concern for the company due to the possibilities of pirates’ attacks. This means that Carnival has to invest in the security of their liners and provide customers with reliable insurance options. Additionally, the existing loopholes in the US tax system are expiring, which means that the company’s profits could be at significant risk. When it comes to the use of resources, the company is obligated to use low sulfur fuel to ensure governmental sustainability. Due to the high costs of this type of fuel, Carnival is at risk of losing profits.
Porter’s Five Forces
Porter’s Five Forces analysis is a tool that allows businesses to understand their competitiveness in the environment that surrounds them to identify the potential success of the developed strategies. Five components of the analysis include competitive rivalry, supplier power, buyer power, the threat of substitution, and the threat of new entry.
Competitive Rivalry
Carnival Corporation & plc dominates the industry of cruise travel, with Royal Caribbean being the second-largest company and therefore the biggest competitors. Instead of facilitating collaboration for reducing the intensity of competition, the two companies choose to compete for capturing the European and North American markets, which points to the highly competitive rivalry.
Supplier Power
Carnival collaborates with suppliers for purchasing advertising, communication, and travel agency services, food and beverages, fuel, hotel, and restaurant products, and many more. The supplier power with regards to the mentioned purchases is relatively strong because the majority of the company’s suppliers operate in a competitive market. On the other hand, the power of suppliers who provide shipbuilding services is weaker because of the incentives to provide competitive prices to such a large company as Carnival.
Buyer Power
Since the potential customers of Carnival are spread around the world, they possess very minimal power to create the experience of traveling by liners themselves. Also, the majority of cruise bookings are made by travel agents, which means that Carnival’s customers do not have enough mechanisms for expressing their collective opinions.
Threat of Substitution
Carnival Corporation & plc faces a high threat of substitution from other types of vacation travel (air travel in particular) due to the lower costs or customers’ choices. For instance, consumers who can afford spending a generous amount on a luxurious cruise may choose an all-inclusive resort since it is more wide-spread and less risky.
The threat of New Entrants
Being the largest cruise company in the world, Carnival Corporation & plc is not threatened by the low risk of new entrants to the market. Since the entry to the market of high-end cruise travel may cost a company up to one billion dollars, there is a very limited number of investors that could do so. Apart from financial investments, skilled personnel is needed to serve the liners and provide customers with high-quality services.
CAPM Analysis
Capital Asset Pricing Model (CAPM) is a strategic business tool used for calculating the required rate of return for the risky assets of a company. Since the company has experienced significant fluctuations in stock prices even during the same year. For example, in 2010, the stock prices fluctuated between $55, $17, and $42 per share. With beta reaching 1.51, the company’s stocks progressed in parallel with DOW (Dow Jones Industrial Average) and S&P 500 (Standard & Poor’s 500 Index) while underperforming in both of them. Overall, market analysts were commending to continue holding Carnival’s stocks because of the market’s cap of $33.51 billion and the Forward Price to Earnings (Forward P/E) of 14.59.
If to determine Carnival’s CAPM, the following formula should be used:
ra = rrf + Ba (rm – rrf), where Ba refers to the asset’s beta, rm refers to the expected rate of return in a broad market, and rrf refers to the rate of return for risk-free security (“Capital Asset Pricing Model”).
In Carnival’s example, Ba = 0.85, rrf = 2.83%, rm = 6% (Guru Focus).
ra = 2.83 + 0.85 (6 – 2.83) = 2.83 + 0.85 * 3.17 = 5.52% (because of the lack of available data necessary for making the calculation, it was chosen to use the latest information (2017) provided by the Guru Focus website that engages in publishing business news, research, and commentary). The calculated rate is consistent with the latest trend of the company underperforming in the industry in recent years, point to the need of reducing the stock prices per share.
Works Cited
“Capital Asset Pricing Model.” Investinganswers, 2017. Web.
Guru Focus. “Carnival Corp.” Gurufocus, 2017. Web.