Download Summary of In-class discussion of Carnival assignment 1A. Major

45-870 Strategic Corporate Management
2015 Mini 4
Prof. Miller
Summary of In-class discussion of Carnival assignment
1A. Major Players
(i)
(ii)
(iii)
(iv)
(v)
Carnival Cruise Lines: Carnival’s actions have large implications for its future profitability, as
how it chooses to address the quality control issues it currently faces may either restore its
reputation and usher in more customers or further hamper their image in the public eye
Competing cruise lines: These include Royal Caribbean, Disney Cruise Lines, and any other
cruise line operators. These firms are important players as any action taken by these firms
has large strategic implications for Carnival.
Consumers: Consumers’ reactions to the strategies implemented by the firm (and firms’
anticipations of these reactions) determine how much profit the firms stand to gain from
their chosen actions.
Regulators: Regulators may attempt to tighten regulations regarding cruise line quality.
These regulations may force the hands of firms to upgrade their vessels when they
otherwise may not. These regulators include the country in which the boats originate.
Other travel agencies: any firm that offers vacations that don’t include cruises may be
competing for the same customers; as such, their actions influence the value of the firms in
the cruise line industry
1B. Minor Players
(i)
(ii)
(iii)
(iv)
(v)
Operational and financial support
Foreign governments
General public/media
Legislators
Coast guard/disaster response
2A. Major Actions
(i)
(ii)
(iii)
Carnival: Carnival can choose to do nothing and continue their operations as normal, expand
geographically to other counties/markets, change pricing and/or offer price promotions,
invest in upgrades for their vessels, or engage in an aggressive marketing campaign and
settle any lawsuits against the company
Competing cruise lines: Carnival’s competitors can try to take advantage of Carnival’s
accidents by drawing attention to them in the hope that cruise customers will switch away
from Carnival. They may also attempt to draw customers away from Carnival using other
means, such as discounts or other pricing promotions.
Regulators: regulatory authorities may impose additional quality restrictions on the cruise
lines in an attempt to safeguard consumer welfare.
(iv)
(v)
(vi)
Shareholders might attempt to change company management.
Consumers may choose to stop going on Carnival cruises or to stop going on cruises
altogether
Other travel options can draw consumers away from cruises with price promotions targeted
at current cruise line customers
2B. Minor Actions (Note: In the class discussion there was some disagreement over which actions
should be considered major and which should be considered minor. I have avoided double-counting
actions, so some of the actions from section 2A could also be considered minor actions with the
proper justification.)
(i)
(ii)
(iii)
(iv)
(v)
Legal team can choose whether or not to fight current lawsuits or settle out of court.
Governments can increase taxes or impose restrictions on cruise lines, but this may be
difficult or impossible to do for legal reasons.
Creditors can make it more difficult for Carnival to invest.
A joint effort from all cruise line operators could be made to improve the image of the
industry.
Carnival can adjust the personnel aboard their ships to improve how accidents are handled
and/or prevent accidents.
2C. Role of Uncertainty
(i)
(ii)
Firms are uncertain as to how customers will react to firm strategies. Specifically, whether
or not an investment in upgrades to Carnival ships will generate enough additional demand
to bring a positive return is a large source of uncertainty faced by Carnival. If consumers
have long memories, even an investment in ship upgrades may not fix Carnival’s image
problem. Conversely, if consumers do not associate accidents with a brand over long
periods, a relatively small investment in upgrades could be enough to rectify the image
problem Carnival currently faces.
Should Carnival or its competitors attempt to expand to other markets, a source of risk
faced by the firms is how the government of the country in the new market will respond to
the entry of the cruise lines. If the government facilitates the cruise entry of the cruise into
the country, the expansion has a much better chance of being successful. However, should
the government or regulatory agencies in the country object to the expansion the possibility
that the venture fails is much higher.
2D. Calculation of probabilities
(i)
One way to assess the probability of accidents is to count the number of trips on which
accidents have occurred and use this proportion as an estimate for the chance of a mishap.
When assessing the economic significance of these events in terms of the impact on the
company’s profitability, additional weight can be placed on especially major events in which
lives are lost or the event has drawn significant negative media attention.
(ii)
One group suggested that Carnival could upgrade their ships and then should assign
probabilities in the following way: consumers can choose between Carnival, a Carnival
competitor, or not to go on a cruise. There is a 40% chance that consumers choose Carnival,
a 30% chance that consumers choose a Carnival competitor, and a 30% chance that no
cruise line is selected.
3A. Information of each player
(i)
(ii)
(iii)
(iv)
Carnival is has information on the current condition of all of their ships, internal reports of
customer satisfaction that may allow them to more accurately estimate the effect that a
marketing campaign would have on consumer demand, and they can use internal data and
technical expertise to obtain the more precise viewpoint of their current standing than
outside firms will have access to.
Regulators have imperfect information on the operation of the cruise lines, and this may
inhibit attempts to regulate based on quality issues.
Cruise customers have knowledge of their own personal experiences, and can learn about
the experiences of other customers from travel information sources.
Carnival’s direct competitors have access to their own internal data that provides them with
the means to make the most accurate forecasts. Additionally, they will have some
information about the condition of Carnival’s ships and the costs associated with upgrading
the vessels; however these are likely to be imprecise. Another source of uncertainty faced
by any cruise line is the effect that a direct attempt to call attention to Carnival’s troubles
could have on the entire industry. It is possible that the industry as a whole could suffer if
more consumers are aware of the quality control issues faced by Carnival.
3B. Asymmetries in information
(i)
(ii)
(iii)
Each cruise line firm will know its own plans to upgrade and will not have access to other
firms’ plans. It is possible that very large investments will be noticed by other firms as they
may be detected on accounting statements released by the firm.
Cruise lines that specialize in specific areas will have more expertise. For example, Disney
Cruise Lines may have more knowledge about family cruises.
Consumers will not have full access to the information about ship quality that Carnival (and
other cruise lines) has; they will need to make decisions based on the imperfect information
obtained from personal experience, travel testimonials, and other media sources.
4A. Outcomes
(i)
(ii)
If Carnival chooses to pursue a marketing campaign, it is possible that the campaign is
successful and brings more consumers to Carnival but it is also a possibility that the
marketing campaign exacerbates the problem by making consumers aware of previous
issues.
Carnival can also choose to upgrade their ships, and this could either resolve their quality
control issues and attract more customers or fail to adequately address the issues they face.
(iii)
(iv)
For Carnival’s competition, the may be able to promote their own brands and draw
customers away from Carnival. If this strategy includes a slander campaign against Carnival
this could backfire and harm the industry as a whole.
The cruise industry could lose customers due to a combination of negative media attention
surrounding Carnival’s accidents and attempts from other vacation and travel agencies to
lure consumers away from the cruise industry.
4B. Valuing outcomes
There were two ways to value outcomes that were proposed during the in-class discussion of the
assignment. They are given below as examples.
(i)
(ii)
Let’s examine the decision of whether or not Carnival should invest in ship upgrades.
Assume that every dollar invested yields to an overall gain of $1. Customers choose
between Carnival cruise lines, a Carnival competitor, or can choose to not go on a cruise.
Again suppose Carnival is deciding on the level on investment in ship upgrades. Since the
long term future of the company is affected by the rate of accidents, Carnival should
consider upgrading their vessels to minimize this risk. While the industry has had a growth
rate of about 7%, Carnival’s growth rate has only been around 1%. However, Carnival’s
growth increased as the incidents tapered off, suggesting that minimizing incidents is a good
way for Carnival to increase their growth. It is possible that Carnival has simply been unlucky
relative to the rest of the industry, but an investment of $700 million in ship upgrades would
greatly reduce the risk of future accidents and would most likely benefit shareholders in the
long run.