Porter’s 5 forces model allows to analyse the factors outside the Cruise industry that influence the nature of Carnival competition within it, the forces inside the Cruise industry that influence the way in which Carnival compete, and so the company’s likely profitability. With an understanding of where power lies, Carnival can take advantages of a situation of strength, improve a situation of weakness and avoid taking wrong strategies.
Porter has identified five competitive forces that shape every industry and every market: bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threat of substitutes and rivalry among competitors. A sixth element has also been added to acknowledge others stakeholders such as employees and shareholders. (See graph) Bargaining power of suppliers. Suppliers for Carnival include travel agency, fuel, food and beverages, hotel and restaurant supplies, port facility utilization and dry-docking, repairs and maintenance, communication services and advertising.
Travel agencies held a strong position as they are an important source of Carnival’s success and provide a massive amount of customers supplied. Without the travel agencies the company would lose a significant volume of customers and the decrease in profitability will be inevitable. The supply of fuel is another element that increase the power of supplier, the fuel is a consolidated industry and can dictate the cost of oil; even if the company try to hedged the price of fuel oil it can’t limited or have an influence on the price neither avoid to buy it.
As the dimension of some of the Carnival’s ships doesn’t allow it to attract in any single port, the power of the limited ports where the company can attract its big ships is high. The port facility utilization is an important factor in the business of the company as it allow the company to increase the ports at call and distinguish the Carnival’s cruise vacations.
The suppliers of food and beverages for all the cruise brands haven’t a strong position as the high number of suppliers that allow the company to shop around for the best prices even if the strategy adopted by Carnival is to select a number of supplier to obtain volume discounts. The company owns also a chain of hotels and lodges in Alaska to complement Alaska cruises, also this hotel and restaurant supplies have a weak position against Carnival.
The company’s ships require a constant refurbishment and reparations, as Carnival has very few options for choices, the embarkation suppliers can have an high influence in the cost applied. The last elements that determine the bargaining power of suppliers are the communication services and advertising, even if the main communication channel with the costumers is through the travel agency, the company increased online and social media advertising that allow Carnival to establish direct conversation with consumers and also create brand fans. Due to this trend the company doesn’t suffer from the power of this type of suppliers.
In summary, because of the high power of travel agencies, supply of fuel, port facility utilization and dry-docking, repairs and maintenance even if Carnival can have a strong position against the suppliers of food and beverages, hotel and restaurant, communication services and advertising; the bargaining power of suppliers is high. Bargaining power of buyers. Carnival caters cruise vacations to a very diverse population, they offer cruises that meet every budget, to many different geographic locations and offer cruises that last only a few days or up to weeks.
This characteristic of the company business create a low concentration of buyers relative to that of the suppliers, therefore reducing the bargaining power of buyers. The customers are spread across different locations and don’t share a common platform where they could exert a collective voice. The cruise vacations provided by Carnival are prevalent direct to the middle-class, the average cost of the company cruise ticket can be seen as low relative to the customers’ annual income. With this considerations buyers have low price sensitivity that allow Carnival to have a strong position.
Carnival is a leader in the cruise industry and it’s highly likely that the consumers would select this company; as it is also a branded company recognizable on the market it allow the process of word of mouth that lessen the power of the consumers from their self. Even if the company can have a strong position against its buyers due to the business characteristics the close relationship that the customers have with the travel agencies gives their a greater influence over the ticket price.
In summary, the low price sensitivity, low buyer concentration and the leadership of Carnival in the ruise industry on one hand enhances the buyer power while a high degree of involvement of travel agency on the other reduces their bargaining power, the power of buyer of the buyers in the cruise line market of Carnival is moderate. Threat of new entrants’ category. Factors affecting the ability of new comers to enter the market include capital requirements and cost of fuel, economies of scale, access to channels of distribution, constraint of brand equity, threat of M&A and regulation on Maritime cruises.
It is difficult for new cruise lines to enter this market since the level of star-up capital required is extremely high given the average cost of a cruise ship and the capital required to train employees. Also the cost of fuel will be an important element of the cost analysis of the new entrants. Due to the high start-up costs will be difficult for the new entrances to achieve economies of scales and this means that the price cannot be cheap because the cost of sailing per passenger are high.
Another important factor is the branding and image of the two major players in the cruise industry, Carnival and Royal Caribbean that combined have the major share market. A new entrant would have high investments in marketing and advertising in order to become recognized as a true competitor to Carnival and Royal Caribbean. Most buyers are inclined to choose a well-established cruise line due to the customer loyalty, it would take years for a newly introduced cruise company to develop a well-recognized identity and they maybe have to adopt a discount ticket to compensate the lack of brand recognition.
The easiest way to enter the cruise industry appears to be via mergers, acquisitions and takeovers thus limiting the number of potential entrants. In summary, with the huge capital requirement, difficult achievement of economies of scales and constraint of brand equity, the threat of new entrants in the cruise industry is low. Lastly, there are strict government and international regulations on Maritime cruise that are involved with a cruise company. Obtaining proper permits to operate, as well as the political connections, would also cost to a company a large amount of time and resources.
Threat of substitutes. Substitutes for a cruise include many other types of vacations. A vacationer could choose to go to hotel and resort, go straight to their destination of choice by plane/train/bus/automotive instead of cruising there, camping, beach vacations, alternative forms of leisure and usually cheaper accommodation such an informal accommodation at friend and family, and the use of a second house or apartments. Carnival can’t do so much if the test and preference of the consumers change and increase the propensity of customers to switch to alternatives.
Land based vacations are a big threat to Carnival, many vacationers don’t think of cruises when planning trips; Cruise Market Watch, a cruise vacation research company, estimated that all cruise lines will carry an annualized total passenger count worldwide of 18. 4 million in 2010. Another important aspect in the threat of substitutes is the buyer propensity to substitutes. The travel agencies play a big part in the purchasing decisions of consumers in the leisure industry. As the intermediate between the company and the customer, travel agencies can supplier different vacation packages.
Carnival must offer competitive price to secure sales during economic downturns when customer’s propensity to switch to lower-cost substitutes are higher. Despite the availability of various traveling options, Carnival can take advantages from the distinctiveness of the cruise experience. The experience that a cruise liners offers is so distinctive that quite lot of people would stick to the cruise line experiences event though the alternatives might be more economically feasible.
In summary, though diverse substitutes exist in the industry and customers exhibit relatively high propensity to substitutes during times of economic downturns, the distinctiveness of the cruise experience renders the threat of substitutes to be moderate/high. Rivalry among competitors. The other well-known cruise lines include Royal Caribberan, Norwegian and Disney, with Royal Caribbean posing the greatest competitor for Carnival. Carnival has 55% of the market in North America, while Royal Caribbean only has 27% and the next closest competitor is Norwegian with 10%.
The circumstances are similar even in the international markets where carnival leads with 52% and Royal Caribbean has 22%. The competition of established firms in the cruise line industry shows an high concentration, as can been seen the cruise line industry is an oligopoly market. In this situation each participant is aware of the actions of the others, and therefore as one reacts, the others follow. The rivalry among competitors is also determined by the relatively high competitor diversity. Carnival operates in three cruise market segments, namely contemporary, premium and luxury.
Companies in different market segments cater to different customers by offering varying levels of service and expertise with different strategies, thus reducing the extent of competitiveness among the existing firms. The market segment where Carnival has potential threats is the premium. In summary, despite the high concentration in the cruise market, the relatively high competitor diversity lead us to the conclusion that the overall rivalry within the cruise line sector is moderate. Other stakeholders In the other stakeholders forces are included employees and shareholders.
As the high numbers of employees both full-time that part-time/seasonal, Carnival has to pay attention at the job conditions of its crews. Carnival had cited several times for exploitation of its crews, these events can cause both a potential reputational risk for the company and the decision of the employees to leave for another cruise line. Shareholders also have influence in the decisions adopted by Carnival, the trend of the stock price and the remuneration are elements that, if negative, can conduct shareholders to abandon the company.
However this forces have proved to don’t have an high impact on Carnival. Overall, Carnival’s branding is strong within the industry and even stronger within its market category. It is one of the two well-known cruise lines. Because of its strength in threat of new entrant’s and bargaining power of buyers categories, Carnival is able to maintain its market share and profitability. When compared to its competitors, carnival continues to remain a formidable force in the cruise industry.