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Royal Caribbean Strategic Analysis

In: Business and Management

Submitted By rudolphmx
Words 10860
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|Royal Caribbean Cruises Ltd. |
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Table of Contents

Table of Contents 1
Executive Summary 3
Introduction 4 History 4 Vision and Mission Statements 7
Strategic Assessment 9 External Analysis 9 Overview of the Cruise Line Industry: 9 External Threats: 10 External Opportunities: 12 Conclusion of External Analysis: 13 Internal Forces Evaluation Matrix 14 Strengths 14 Weaknesses: 17 Financial and Operational Analysis 19 Evaluation: 19 Revenues: 19 Profits: 20 Financial Ratios: 21
Strategic Selection Tools 24 SWOT Analysis: 24 Internal-External (IE) Matrix 26 The Grand Strategy Matrix 27 Space Matrix 28 Strategy Selection 31
Action Plan 32 Human Resources Action Plan 32 Implementation Activities and Schedule: 32 Implementation Risks and Risk Mitigation Strategies: 33 Marketing Action Plan 33 Market Segmentation: 34 Marketing Mix: 35 Implementation Activities and Schedule: 36 Performance & Evaluation: 36 Implementation Risks and Risk Mitigation Strategies: 36 Financial Action Plan 37 Performance & Evaluation: 38 Implementation Risks and Risk Mitigation Strategies: 39

Executive Summary

This report provides an analysis and evaluation of the current strategic position of Royal Caribbean Cruise Lines. Methods of analysis include a strategic assessment of the industry and financials, strategic recommendations derived from strategy analysis and an action plan for the future. Strategy matrices can be found in the appendices. Results of the data show that Royal Caribbean is in a strong position in the industry. The majority of the performance issues they have are external and beyond their control. The report finds that Royal Caribbean is in a positive financial position with the major area of weakness being the operating costs of the company. Other indicators show that Royal Caribbean will remain profitable in the future as the economy continues to recover and discretionary income increases.

Introduction

Every organization has a unique purpose and reason for existence and in order to have a good understanding of a business and to be able to complete a strategic plan for any organization, it is important to understand what that business does. Royal Caribbean Cruises Ltd. is the second largest global cruise company in the world and owns five cruise company brands which include Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, and CDF Croisieres de France. They also have a 50% investment in a joint venture with the German-based cruise line TUI Cruises. Royal Caribbean Cruises Ltd. operates a combined total of 40 ships with a combined passenger berths of 92,300. By the end of 2010, Royal Caribbean Cruises Ltd. provided services to over 4.5 million guests worldwide taking them to over 400 different destinations around the globe. The company also is planning on introducing two additional ships by the end of 2012 that would increase their passenger space to about 98,000 berths (PHX, 2012). In order to get a better understanding of Royal Caribbean, we need to take a brief look at their history, which will provide us with the foundation of the company.

History

Before 1970, cruise lines existed but were mostly used to transport people from one side of the world to the other in trans-ocean trips or cruises around the world on large passenger liners. Back then, it was also only affordable to the wealthy so when three Norwegian shipping companies decided to get together and form the Royal Caribbean Cruise Line, it was the start of a whole new industry (Funding, 2012). In 1968, the three Norwegian shipping companies; Anders Wilhelmsen & Company, I.M. Skauge & Company and later Gotaas Larsen established the Royal Caribbean Cruise Line, but did not have a ship ready for sailing until the “Song of Norway” was completed in November of 1970. The “Song of Norway” was one of the first ships designed to be used in warm water areas that could be used for year-round cruising and with its 724 passenger capacity, it proved to be a success. In 1971 Royal Caribbean introduced their second ship, the “Nordic Prince,” and with the introduction of their second ship, they also introduced the concept of including passenger’s air fare in the price of the cruise vacation. Later, with the company’s introduction of their third ship, the “Sun Viking” in 1972, Royal Caribbean became the largest cruise line in the Caribbean. With three ships, the company was able to provide 7 and 14-night vacations that departed on a weekly basis from Miami. Royal Caribbean built on their name brand for the next decade by innovating high quality service for their customers on their cruises and focusing on marketing and customer satisfaction that helped set the company apart from their competitors. Another way the company set itself apart was in 1978 when they added an additional 85-foot section to the center of their first ship, the “Song of Norway.” It was the first passenger ship to be lengthened by cutting the midsection of the ship in two and adding the 85-foot expansion that increased the passenger capacity from 724 to 1024. In 1980, Royal Caribbean did the same to the “Nordic Prince” by stretching it and adding additional passenger room. Later, in 1982, after years of building the industry, Royal Caribbean finally introduced “Song of America,” a new ship that was twice the size of the “Sun Viking” (Royal, 2012). In 1986, Royal Caribbean introduced another first in the industry by introducing their first exclusive private destination vacation which was called Labadee off the north coast of Hispaniola. Later in 1988, Royal Caribbean merged and absorbed Admiral Cruises and gave control of the company to Anders Wilhelsem & Company since they bought out the other two shareholder companies as a way to stop any take-over from Carnival Cruises since they were offering to buy the company (Castles, 2011). Following the merger, the largest passenger vessel, “Sovereign of the Seas,” was put into service. Then, in 1990, two more vessels enter into service and the company buys their second exclusive private location naming it “Coco Cay.” In 1991, Royal Caribbean introduces the world’s first automated cruise booking system that allowed over 29,000 travel agencies to simplify the process by using their “CruiseMatch 2000” system to book customers on a cruise. The next few years, there is not much change in the number of ships that Royal Caribbean possesses with a total of nine ships and it allows the company to concentrate on their finances (Royal, 2012). In 1993, Royal Caribbean went public and offered 11.5 million shares of common stock under the name “RCL” helping them reduce their debt ratio to 47% from a high 75% (Funding, 2012). From 1993 to 1996 Royal Caribbean continues to build bigger and bigger ships that eventually leads them to introducing some of the largest ships in the world with a capacity of over 2,000 passengers by 1997. In 1997, this was also the year that Royal Caribbean Cruise Lines changed their name to “Royal Caribbean International” to reflect their merger with Greek company Celebrity Cruises (Muse, 2011). Then, from 1998 to 2011, the cruise line industry continued to grow and Royal Caribbean International continued to bring some of the largest passenger ships the world has seen to include the 6,300 passenger Oasis-Class ships the “Allure of the Seas” and the “Oasis of the Seas” that make up Royal Caribbean International. Royal Caribbean continues to excel in customer service and continues to attract their passengers with their forty ship fleet which now include swimming pools, miniature golf courses, shopping malls, coffee shops, rock climbing, Wi-Fi and many other amenities. Royal Caribbean Cruises Ltd. continues to be one of the leading cruise companies in the world not just because of everything that their ships offer their passengers but also due to their strong commitment to their vision and mission statements that continue to lead them over the horizon (Royal, 2012).

Vision and Mission Statements

The vision and mission statement of any company is probably one of the most important aspects of a company since it describes the “core broad purpose and reason for existence” (Daft, 2011, p. 405). A clear statement can also be used to formulate clear, concise strategies with established objectives that have a direct view of where the company wants to be (David, 2011, p. 44). Royal Caribbean’s vision is very interesting since it is short but clear of where they see themselves in the future. It simply states: “Our vision is to empower and enable our employees to deliver the best vacation experience for our guest, thereby generating superior returns for our shareholders and enhancing the well-being of our communities” (Royal, 2012) The vision statement is short but it fulfills many of the requirements needed to motivate their employees by empowering them, their customers by getting the best vacation available, their shareholders by generating superior returns, and all other stakeholders involved in the Royal Caribbean community since in the company’s vision statement they mention that they are committed to enhancing the community and their well-being whether it’s the environment or the programs they offer (Royal, 2012) In order to meet their vision however, they also need to have a mission statement that defines what the company is all about. The mission statement on Royal Caribbean’s website is simple to find since it is on their main page and it is simply bulletined for easy reading and understanding. It simply reads: • We always provide service with a friendly greeting and a smile. • We anticipate the needs of our customers. • We make all efforts to exceed our customers' expectations. • We take ownership of any problem that is brought to our attention. • We engage in conduct that enhances our corporate reputation and employee morale. • We are committed to act in the highest ethical manner and respect the rights and dignity of others. • We are loyal to Royal Caribbean and Celebrity and strive for continuous improvement in everything we do. Royal Caribbean is committed to bringing satisfaction to their customer because they truly believe that the way to be successful is to keep a loyal customer. Their mission statement definitely provides the essential foundation needed to produce strategies, plans and assignments to all their employees since it makes it clear to all what the priorities are. The mission statement is clear and concise and strategic in nature since it clearly conveys their goals, their values and philosophies that give their employees and management a guideline of how to conduct daily business in order to ensure the customer, the employees, and the community at large are always the number one priority. Any company that wants to be successful needs to have a vision and mission statement since it defines the company’s unique reason for being. The vision and mission statement of Royal Caribbean is a very effective tool that the company continues to work on in order to stay ahead of their competition when it comes to customer satisfaction. The vision and mission statement continue to guide the company and is an easy way to conduct a strategic assessment since it provides a vision of where the company is and where they want to be.

Strategic Assessment

External Analysis

Overview of the Cruise Line Industry:

The cruise industry is one of the fastest growing sectors of the leisure travel market, expanding at an average annual growth rate of approximately 7% (FCCA, 2012) The current target market for cruise customers is said to be individuals 25 years of age or older, with an annual income over $40,000 per year. While this is considered the industry’s marketing target, a 2008 survey by the Cruise Line Industry Association showed the following customer characteristics: • Average age of 46 • 93% of passengers are Caucasian • 65% are college graduates • 83% are married • 58% work full time • Average household income of $90,000 (Wind Rose Network, 2012) Currently the market is dominated by Carnival Cruise Lines, who holds 49.2% of the market, and Royal Caribbean Lines who holds 23.8% of the market. The next closest competitors are Norwegian (7.1%), MSC Cruises (5.8%) and Disney (2.9%). (Cruise Market Watch, 2012)
External Threats:
Highly Competitive Market: The cruise line industry exists within the highly competitive travel industry. Even though cruise lines have few competitors within their own market, they must be proactive against competing markets as well. In the global hotel, resorts, and cruise line industry, cruise lines make up the smallest percentage, currently 4.4%. (See chart below) (Datamonitor, 2011) In addition, they must also compete with sightseeing vacations, theme parks, and various other vacation alternatives. [pic]

Economic Downturn: The global economic downturn began in the United States in December, 2007. By the end of 2009, the United States had seen the loss of 11.7 million jobs. With a deteriorating job market it was inevitable that consumer expenditures would begin to retract. In 2009 alone, recreation spending fell by 1.3% and accommodation spending fell by 2.9%. To make matters worse for the cruise industry, yearly additions of new ships to the North American fleet continues to increase capacity. In 2009 alone, this increase in capacity and decrease in spending ultimately meant that cruise lines were forced to slash prices to maintain full capacity. The end result was a 3% increase in passengers but an 11.4% decrease in gross revenues. (CLIA, 2010)
Costa Concordia Disaster: Two major external threats at play in the cruise industry are environmental regulations and safety regulations. Both of these issues have come under considerable scrutiny with the January 13, 2012 Costa Concordia disaster. Currently, all cruise ships must be designed and operated in compliance with the strict requirements of the International Maritime Organization, the UN agency that mandates global standards for the safety and operation of cruise ships. The Costa Concordia disaster has left 16 people dead and 16 missing, bringing up questions as to whether the industry regulations need to be tightened. Officials have also expressed concerns over the spilling of the ships full load of fuel into the waters off the island of Giglio. The industry has been under attack from numerous environmental groups in the past and any environmental damage from this disaster could result in additional environmental regulations. While increased regulations may be good for human welfare, they will significantly affect both operations and profits. (Jewkes, 2012) The Costa Concordia disaster could also cost the cruise industry millions as bad publicity leads to low consumer confidence, a drop off in bookings and eventually price wars as cruise lines try to boost sales. (Mayerowitz, 2012)
Rising Oil Prices: Rising oil prices can play havoc on cruise line profits, making fuel price risk management a top priority for all travel industries. Fuel price risk not only comes from the volatile price fluctuations of oil but also from European environmental regulations due to be implemented in 2012, new rulings will demand that cruise liners use higher quality low-sulphur fuel, with the hope of cutting the level of sulphur from 4.5% to 0.1% by 2015. It has been estimated that the use of these fuels will increase fuel costs by an extra £10,000 per day per vessel. (World cruise network, 2011)
External Opportunities:
Growth Potential: Recently released estimates from the Florida- Caribbean Cruise Association place the number of 2011 cruise passengers at 16 million with 11.1 million of those passenger coming from North America. 2012 is expected to see a possible 5.6% increase in booking over 2011 figures, with a total market estimate of $34.1 billion (Cruise Market Watch, Nov. 2011). The cruise industry has a relatively low travel market penetration rate with only 15% of Americans having ever taken a cruise. This allows for a wide potential of growth in the United States, not to mention potential worldwide growth. (Wind Rose Network, 2012) Richard Fain, chairman and chief executive officer, Royal Caribbean Cruises Ltd points out "Every time people predict that the industry is reaching a mature level of saturation," says Fain, "new markets open up, and, sure enough, we're discovering at this point continued significant growth in Europe, South America, Asia and other areas." (International cruise and ferry, 2010) Enhancing this growth potential is the cruise industry’s unique ability to address variable demand. Cruise lines can simply move vessels away from failing markets and into markets with growth potential.
Expanding Ports: Fueling some of this growth is the establishment of over 30 embarkation ports in North America. That means that 75% of North American vacationers have access to cruise travel within driving distance of their homes, thus eliminating the need for high priced air travel. (FCCA, 2012) As demand for Mexican Rivera and Mediterranean cruises weaken, new ports of call take the lead. Strong demand has been cited for Caribbean, Alaskan, Australian, Hawaiian, and Northern European cruises. (Travel Agent, 2011) The European Travel Commission estimates European travel at all time highs, with travel to such countries as Latvia and Lithuania showing a 20% increase. European travel is not the only growth market, travel between Australia and Asia has shown an 11% increase as well. (Travel Industry Wire, 2012)
Cruise Ship Innovations:
A total of seven ships will be added in 2012. These multimillion dollar investments offer customers amenities such as two story shopping complexes, spas, theaters, libraries, nightclubs, casinos, water parks, luxury dining and more. (Cruise Watch, 2011) As far as safety innovations, William Wright, senior vice president of marine operations for Royal Caribbean International points out that "With size comes safety, … (today’s) megaships are wider, more stable, have the latest navigation systems and more watertight compartmentalization than their predecessors.” (Mayerowitz, 2012)
Conclusion of External Analysis: The cruise line industry has been recognized as having strong growth potential, increasing innovations, and sustainability. Participants in the industry have many opportunities to pursue competitive strategies that can ultimately lead to increased market strength, however all cruise industry participants must remain aware of external threats. Volatile economic conditions, governmental regulations, and competition from other travel industry sectors can all represent threats to the industry’s bottom line. As the second largest company in the industry, Royal Caribbean Cruises, LTD can use the abovementioned external opportunities to develop strategies that will enable it to gain leadership status while hedging itself against external risks.

Internal Forces Evaluation Matrix

Having the second largest cruise operation in the industry (trailing just behind the massive Carnival Corporation and Carnival PLC giant), it should not be surprising that an internal analysis of Royal Caribbean Cruises (RCC) reveals a strong array of internal strengths. An analysis published by Globaldata (2011) reveals cutting-edge innovation, highly competitive profitability ratios and credit ratings, and very strong brand awareness that has allowed them to secure an equally robust market position (Global Data, 2011). According to Datamonitor’s company report (2011) RCC’s internal strengths, however, are impaired by its declining operating margin, its involvement in legal actions, its limited liquidity, and its increasing indebtedness which have contributed to a downgrading in ratings (Datamonitor, 2011)

Strengths

RCC reported strong financials at 2011 year end, which included a 15% increase in net income from 2010 ($607.4 million in 2011), and a net yield increase of 2.4% (Bailey, 2012). A recent article reported RCC’s 4th quarter EPS at 17 cents per share, which surpassed the Zacks Consensus estimate by 3 cents (Zacks Equity Research, 2012). For 2011, earnings were $2.77 per share versus $2.37 in 2010 (ibid). Moreover, sales exceeded the previous quarter by 11% (Jayson, 2012). The positive trends are a strong indication of resilience and sustainable performance amidst the recent Costa Concordia disaster, which has sharply impacted sales throughout the entire cruise line industry. GlobalData’s (2011) analysis reported increasing profitability ratios and high credit ratings, which support its strong performance and its ability to deliver the returns expected by its shareholders. RCC’s 14.6% jump in revenue growth (spurred by excellent operational efficiency) resulted in increased gross margin, which increased 48.78% during 2010 as compared to 47.13% in 2009. The company’s operating cost as percentage of sales declined 88.11% in 2010 from 91.71% in 2009. Additionally, at FY closeout of 2011, ROE (return on equity) increased by 4.7%, return on capital increased by 1.8%, ROA (return on assets) increased by 1.9% and return on fixed assets increased by 1.5% over 2009 (ibid). Strong profitability ratios reflect RCC’s solid performance and reliable returns, which led to the overall growth of its operating margins (OM). 2010 saw an 11.89% OM increase from 8.29% in 2009 and a net profit margin increase of 8.11% in 2010 from 2.76% (ibid). Due to these strong performance indicators, Moody’s upgraded RCC’s credit rating to Ba1 with a stable outlook from Ba2, along with its senior unsecured debt credit rating to Ba2 with a stable outlook from previous year. The high credit ratings will increase investors’ and customers’ confidence, enhance its business opportunities and future growth prospects, and sustain the company's financial condition against the current sales drop-offs resulting from the Costa Concordia disaster (ibid). Aside from its resilient financial position, RCC’s commands a leading market position and presence in the cruising industry. As such, its dominant position in the competitive landscape augments its operational and financial performance. According to Hoovers company overview of RCC (2011), its fleet includes over 40 ships with 92,000 berths, and its five brands “cater to all segments of cruise vacation industry including contemporary, premium, deluxe, and budget and luxury segments”(Global Data, 2011). Itinerary packages include cruise vacations, pre- and post-cruise hotel packages (including fully escorted premium land packages) and range from two to 18 nights on 420 worldwide destinations on all seven continents (ibid). RCC’s outstanding market position is equally complemented, (if not exceeded) by its strong brand awareness and brand name recognition, which has established a loyal flow of customers since its debut in 1969. Its broad portfolio of ship brands include Royal Caribbean International, Celebrity Cruises (leading brands in the contemporary and premium market segments), Pullmantur Cruises (strong brand awareness in Spanish and Latin American contemporary segments), Azamara Cruises (repositioned in 2009 for the deluxe/premium segments), and CDF Croisieres de France (ibid). Regarding its promotion strategies, RCC utilizes multiple techniques to promote its brands and increase its market penetration. In addition to its wide variety of cruise packages, itineraries, destinations, on and off board activities and options, RCC has capitalized on marketing through social media channels, such as Twitter and Facebook, as well as traditional media channels, such as the Travel Channel. To capture the largest segment of Latin American and Spanish customers, Pullmantur Cruises brand advertising campaigns are utilized to target Spanish and Portuguese guests. As the sluggish economy has affected luxury industries the hardest, RCC has been working hard to increase value for its customers though continuous innovation and improvements. For example, Jakeway (2012) reported Celebrity Cruise line’s newest addition to its action packed “Celebrity Life” themes "Celebrity Life Plus," to be an “amplification of the "Taste," "Learn," "Revive" and "Play" themes known for exciting and entertaining vacationers year-round” (Jakeway, 2012a). With a dizzying assortment of activities as it is, such as comparative wine glass workshops, cooking competitions, Rosetta Stone language lessons, iPhoto classes, wellness workshops and pool volleyball with the ship's officers. According to Lisa Lutoff-Perlo, Senior Vice President, Hotel Operations, Celebrity Life Plus will take all the classic elements of traditional cruises and integrate them with the Celebrity Life themes to create the “most comprehensive, enriching, exciting and fun long cruises, offering incredible speakers and other exclusive activities” that have ever been offered in one cruise (ibid). Additionally, Celebrity announced an expansion of their already extensive and sophisticated wine program (Jakeway, 2012b), as well as an industry first, with the premiere of the James Beard House in New York City who will feature cruise line chefs on April 5, 2012, when Celebrity's master chefs Jacques Van Staden and John Suley will cook at the legendary historic venue (Jakeway, 2012c).

Weaknesses:

With such impressive internal strengths, it would seem that RCC is well suited to maintain a leadership role in the cruise line industry. With that said, however, the company is not without its weakness that could potentially upset its reign if left unchecked. Although Carnival Corporation—parent company of the Costa Concordia—is taking the brunt of the negative attention being focused on the cruise industry, RCC is currently involved with its own legal proceedings that are leeching its financial assets, regardless of the outcome. Globaldata (2011) addresses these litigations, and notes that such allegations, while typical within the cruise vacation industry, are nonetheless time consuming and potentially disastrous considering RCC’s operations must be in compliance with various US and international laws. According to Globaldata’s (2011) report, international representative filed several counterclaims against RCC and Celebrity Cruises Inc in Sep 2010 alleging “violations of Puerto Rico’s distributorship laws, bad faith breach of contract, tortuous interference with contract, and violations of federal and state antitrust and unfair competition laws.” More directly associated with its financial well-being, Globaldata (2011) analysts also noted the decrease of RCC’s liquidity ratio, a result of the increase in current liabilities, which rose to $3.4 billion in 2010 from $2.7 billion in 2009, and led to the decline of its liquidity indicators in 2010. The declining current ratio, cash ratio and quick ratio indicate that the company is in a weak position to meet its short term obligations. Moreover, RCC’s debt to equity ratio increased 115.20% in 2010 over the previous year's figure of 112.26%. The increase in the company’s debt to equity ratio signifies that its debt increased substantially, which means that the company would incur more interest expenditure and it would have a negative effect on the overall profitability (RCC’s debt rose to $9.1 billion in 2010 from $8.4 billion in 2009). As stated, “a decrease in liquidity implies limitations on meeting short-term obligations, and could negatively affect operations, as [RCC] would depend more on external sources to fuel its funding needs” (ibid). The Datamonitor (2011) analysis concurs with this finding, stating that “RCC would be required to use a large portion of its cash flow from operations for its debt payments” and that the “higher debt component in the balance sheet would put pressure on the company's ratings and eventually would make the additional financing for working capital, capital expenditures, difficult under the current credit crunch situation” (Datamonitor, 2011).

Financial and Operational Analysis

Evaluation:

In evaluating the financial performance of Royal Caribbean, the income statement and financial ratios were compared against the industry and three key competitors. The first competitor used for evaluation was Carnival Cruise who also owns and operates other cruise lines such as Holland America, Princess, Cunard, and Costa to name a few. (Carnival Corporation, 2012) Another competitor used for evaluation purposes was Genting Hong Kong who owns and operates Star Cruises, Norwegian Cruise Lines, and Resorts World Manila. (Bloomberg Businessweek, 2012) The final competitor used to evaluate the performance of Royal Caribbean is Club Mediterranee, or Club Med. They own cruise ships and yachts as well as worldwide resorts. (Bloomberg Businessweek, 2012)

Revenues:

In 2010 Royal Caribbean reported revenues of $6,752 million. These revenues were up 14.6% from the 2009 revenues of $5,890 million, and 3.3% from the 2008 revenues of $6,533 million. The $643 million drop in revenues from 2008 to 2009 was the direct result of the global recession, and the $862 million from 2009 to 2010 is reflective of the recession recovery. (Royal Caribbean Cruise Lines, 2010) Royal Caribbean was not the only company hit by the recession. (French, 2012) The entire cruise industry suffered lower sales during the same time period. When compared to other major competitors, Royal Caribbean had higher revenues than both Genting and Club Med. Although they had higher revenues than two of their key competitors, they had substantially lower revenues than Carnival who had average total sales of $14,292 million over the three years. (Figure A-3)

Profits:

In terms of profit margin, Royal Caribbean had the worst gross profit margin for all three year when compared to the three major competitors. Their average gross profit margin over the three years was 32 ½%, while Carnival’s, arguably their biggest competitor, had an average gross profit margin almost 5% higher for the three years. Working to raise the growth profit margin is imperative, especially with the current instability of fuel costs and other economic factors. With that said, figure A-4 shows that Royal Caribbean’s operating profit margin was the second highest out of the four competitors at 11%, second only to Carnival at almost 17%. This means that they have one of the lowest general and administrative expenses of the other competitors. Their operating costs alone used 21.5% of their profit while Caribbean’s used 20.5% of their profit. It should also be noted that Royal Caribbean and Carnival are using about the same percentage of G&A costs, but Royal has a much lower gross profit. This means that Caribbean either has a better pricing structure, or is able to operate using lower costs. Royal Caribbean’s net profit margins for 2008, 2009 and 2010 were 8.78%, 2.76%, and 8.11% respectively. The dramatic drop in profits during 2009 was due to the economic recession, but profits quickly recovered in 2010 (French, 2012). This trend was seen in the profits of Carnival and Club Med as well. However, Genting Hong Kong saw a skyrocketing net profit margin in 2010. This was due to Genting’s decrease in general and administrative expenses and the reversal of a previously recognized impairment loss. (Genting Hong Kong, 2011) Royal Caribbean’s pre-tax profit margins were the same as the net profit margin for all three years. This is due to a loophole in the US tax code. There is a provision that allows shipping companies to operate in the US, but incorporate overseas. Even though the company is headquartered out of Miami, Florida, they are incorporated in Liberia allowing them to avoid paying US income tax on their profits. (Walker, 2011) Given the current outcry regarding tax loopholes it is quite possible that provisions such as these could be eliminated in the near future.

Financial Ratios:

We chose to look at working capital and the current ratio to evaluate Royal Caribbean’s liquidity. Working capital takes current assets and subtracts current liabilities. This give a dollar amount for the amount of cash and liquid assets a company has to meet its upcoming requirements. The current ratio is very similar to working capital by dividing current assets into current liabilities. Figure A-5 of the appendix shows Royal Caribbean’s current ratio was very low at .37 for years 2008 and 2009, and .29 for 2010. They had an average negative working capital of $1.95 billion for three years. This was quite better than Carnival who also had a lower than one current ratio and had an average negative working capital of $4 billion for the three years. Club Med was only slightly better with a current ratio of .60 for the three years. Royal Caribbean’s ratio was also substantially worse than Genting Hong Kong, and the industry. Genting had an average ratio over the three years of 1.6 while the industry averaged a current ratio of 2.4 from 2008 -2010. (Dun & Bradstreet, 2011) A ratio of less than one indicates that a company will have a hard time meeting its short-term liabilities. However, in the cruise line industry it is not uncommon to have a less than one ratio. This is because of the relatively low receivables and the recorded liability due to pre-bookings. To measure Royal Caribbean’s leverage, we compared the debt-to-asset ratio and the long-term debt to equity ratios against the three key competitors. The debt-to-asset ratio determines how much of a companies assets are financed using debt. The long-debt to equity ratio determines how much of the companies activities are being financed with debt. The higher the ratio is, then the higher the amount of activities being financed by debt. Royal Caribbean has both the highest debt-to asset ratio and the highest long-term debt to equity ratio of all three companies which can be seen in figure A-6 of the appendix. Their debt-to asset ratio averaged .41 over the three years, while their long-term debt to equity ratio averaged .99 over the years. The three companies combined only had an average debt-to asset ratio of .18 and an average long-term debt to equity ratio of .36. These high ratios mean that Royal Caribbean has very little leverage due to their finance their operation with debt. This also makes Royal Caribbean a risky investment for investors because of the higher risk for default. To evaluate efficiency, we used the asset to sales ratio. The asset to sales ratio shows how efficiently the company is using assets to generate sales. Figure A-7 shows that Royal Caribbean had the second highest average asset to sales percentage when compared to their competitors, and also outperformed the industry from 2008 to 2009. The only competitor that outperformed them for the three years was Genting Hong Kong. This trend tells us that even though Royal Caribbean is financing their operation with debt, they are very successful at using those financed assets to generate sales. To evaluate profitability, we looked at the return on assets, return on equity and the return on capital investment, and compared these percentages with both the industry and key competitors. The return on asset shows how profitable a company’s assets are, while the return on equity measures the return on stockholder’s ownership interest. The return on capital investment shows how efficiently a company allocates capital. As shown in figure A-8 in the Appendix; Royal Caribbean’s return on asset was 3.48%, .89%, and 2.78% for years 2008, 2009, and 2010 respectively. Again the dip in year 2009 was due to the recession. These percentages were lower than both the industry and Carnival cruise. Genting Hong Kong trended upward for all three years, and Club Med followed the same dip pattern as the industry, Carnival and Royal Caribbean. Royal Caribbean’s return on equity although higher than both Club Med and Genting Hong Kong, is lower than both Carnival and the industry in 2008 & 2009. In 2010 the company had a slightly higher ratio than the industry, but still had a lower return on equity than Carnival as shown in figure A-9. This shows that Royal Caribbean is improving on generating a return to their shareholders. Royal Caribbean’s return on capital investment is also trending in the same manner their return on equity is trending. For all three years they had a lower return than Carnival Cruise. However, it should be noted that Genting Hong Kong produced an almost same return as Royal Caribbean in 2010. With Royal Caribbean’s growth in 2010 being from a recession bounce back, and Genting’s coming from actual growth, it is clear that Genting Hong Kong is increasingly becoming a threat for Royal Caribbean.

Strategic Selection Tools

SWOT Analysis:

Upon completing the IFE matrix, the following strengths and weaknesses were determined for Royal Caribbean. The strengths are: • Sales are 11% higher than the prior year’s quarter. • Fourth quarter 2001 earnings of 17 cents exceeded previous year’s earnings. • Net income was up 15% for 2011 to $607.4 million from $515.7 for 2010. • Expanding profitability ratios. • High credit ratings. • Leading market position. • Strong Brand awareness. • Broad portfolio of cruise ships. • Pre Costa Concordia accident, bookings were up 5% than same period last year.
The weaknesses of Royal Caribbean were determined to be: • Operating margin is 6%, worse than prior year’s quarter. • Increased operating costs due to increases in fuel, payroll and transportation costs for employees. • Involvement in legal actions. • Limited liquidity. • Increasing indebtedness and downgrading in ratings. • Post Costa Concordia accident, booking are down 10%-15%. The external analysis which was completed describing Royal Caribbean’s opportunities and threats was used to construct the EFE matrix. It was determined that Royal Caribbean had the following opportunities: • Growth potential due to growing market and increased capacity. • New Ships with innovative features. • Chance to absorb Carnival’s lost customers due to recent accident. • Expanding embarkation port removes high costs of air travel. • Expanding ports of call. • Appealing to different segments of consumers. • New technology makes ships safer. • 11% increase in travel from Australia to Asia. • 20% increase in European travel to Latvia and Lithuania.
The EFE outlined the following threats for Royal Caribbean: • Highly competitive environment. • Price wars between competitors. • Economic downturns causing reduced discretionary income. • Drop in cruise reservations and travel since Costa Concordia accident. • Potential for increased government regulations due to Costa Concordia accident. • Rising oil prices. • Land based vacation alternatives. • Costs of supplies for ship increasing, therefore reducing profit. • Low confidence in cruise line industry as a whole since Costa Concordia accident. • Increased environmental regulations to reduce ship emissions. • New Ships added to fleet may equal loss in profits. • Construction delays on pre ordered ships.

Internal-External (IE) Matrix

The Internal-External (IE) Matrix is a strategy formulation tool used to determine in what direction a business should go in terms of their strategy and is based off a company’s strengths, weaknesses, opportunities and threats from the IFE and EFE matrices. Overall it will help a business determine if they should utilize a "grow and build" strategy, "hold and maintain" strategy or "harvest or divest" strategy (David, p. 189). The weighted scores on the EFE and IFE matrices were determined by the weight and rating of each opportunity, threat, strength and weakness. With the weighted scores the IE matrix was constructed. The IFE score was 2.97 which is an average internal position and the EFE score was 2.14 which is a medium internal position. After plotting the scores on the x and y axis of the nine cell IE matrix, it is determined that Royal Caribbean falls into cell 5. David describes any company that falls into cells 3, 5, and 7 as companies that are best managed with the hold and maintain strategies of market penetration and product development (David, 2011, p. 189). Royal Caribbean could focus their strategy on market penetration by increasing their marketing efforts directly to different segments in the market such as families or retired adults. They could also focus on the safety of cruise ships in an effort to win back the trust and confidence of the consumers they lost after the Costa Concordia accident. Royal Caribbean needs to maintain a focus on product development by introducing new ships to the market to stay competitive and also by introducing new embarkation ports and ports of call. In order to add value to their ships they could also overhaul older ships and add new amenities such as a Starbucks and redo the cabins to make them fresh for guests.

The Grand Strategy Matrix

The Grand Strategy Matrix has become a popular tool for developing alternative strategies. All organizations can be placed into one of the matrix’s four quadrants based on the organizations degree of market growth and competitive position. Each quadrant has a list of strategy recommendations that can be considered during the decision phase of the strategy formation process. Royal Caribbean Cruise, LTD has a current world wide market share of 23.8%, making it the industry’s second largest competitor. (Cruise Market Watch, 2012) In addition, between end of year 2008 and end of year 2009, Royal Caribbean Cruises grew revenues from $6.8 billion to $7.5 billion. They have also been able to reduce the percentage of sales devoted to cost of goods sold from 66.02% to 65.58%, leading to the company’s 2011 net income growth from $547.5 million to $607.4 million. (Bloomberg Business Week, 2012) Given Royal Caribbean’s strong competitive position and the industry’s expected growth of 5.6% in 2012, not to mention the industry’s unique ability to move operations to high growth areas, the organization is positioned in Quadrant I of the Grand Strategy matrix. This quadrant lists appropriate strategies as: • Market Development • Market Penetration • Product Development • Forward Integration • Backward Integration • Horizontal Integration • Related diversification Since Royal Caribbean is positioned in Quadrant I of the matrix they can focus on expanding their services to new geographic areas to such locations as the European countries of Latvia and Lithuania. They can focus on market penetration strategies by increasing marketing efforts. This marketing effort can focus on safety, reliability, and the organizations intense environmental program. Product development strategies can focus on ship renovations, expanded services, and services to niche markets. Since Royal Caribbean currently has high levels of debt and liquidity issues, integrations strategies would need to follow strategies to increase cash flow and equity financing campaigns.

Space Matrix

The Strategic Position and Action Evaluation Matrix or otherwise known as the SPACE analysis matrix is not well-known or used, but is a very useful tool used to develop and review a company’s strategy. The matrix contains four quadrants that show whether conservative, aggressive, defensive, or competitive strategies are more suitable for a given business organization depending on their position (David, 2011, p. 181). The axes of the matrix are represented by an FP for Financial Position and CP for the Competitive Position, which are the internal dimensions of the company being analyzed. Then, the two external strategic positions on the axes are SP for Stability Position and IP for the Industry Position. Depending on the internal and external factors for the company being analyzed will determine where in the quadrant the company will position. The position of the company on the quadrant will show its strategy formulation position in the marketplace. Factors used to determine Royal Caribbean’s position on the SPACE matrix were pulled from the External Factor analysis and the Internal Factor analysis that were completed earlier. The Financial position of Royal Caribbean was compared to Carnival Corporation, the number one cruise company in the industry, and against the industry averages. Overall, the FP average was 4.75 since even though Royal Caribbean was not number one in some of the areas of finance, they were still in some areas ahead of Carnival Corp. and ahead of the industry averages. For example, the liquidity ratio for Royal Caribbean was only .22% showing that they are dependent on their sales and are way behind the acceptable range of 1%. However, compared to the industry average of .66% it’s still behind, but compared to Carnival Corp. having a mere .12%, they are still ahead of their competition and therefore rated a score of 3 (Hoover’s, 2012) The Competitive position (CP) factors included market share, brand & image, innovation, and quality and gave Royal Caribbean an average -1.75. Royal Caribbean fared well in these categories because Royal Caribbean is not the largest company, but they still have 23.8% market share making it the industry’s second largest cruise company (Cruise Market Watch, 2012). Royal Caribbean has also been working on their brand and image and fared well especially compared to Carnival Corp. and their recent dilemmas with the Costa Concordia sinking and their Costa Allegra catching on fire and ending up stranded in the water (Ramasawmy, 2012). Royal Caribbean also scored high on innovation because they were the first cruise company to add a Starbucks on their ships (Sloan, 2010). The Stability Position (SP) consisted of several factors that included demand elasticity, technological changes, competitive pressure, and risk involved in the business and Royal Caribbean had an average of – 3.50. In the demand elasticity factor, Royal Caribbean fared well since even though cruises are very elastic in demand since they compete against land based vacations, during the worst year of the economy meltdown, Royal Caribbean was still able to grow revenues from $6.8 billion in 2008 to $7.5 billion in 2009 (Bloomberg, 2012). The technology factor, Royal Caribbean dominates in that factor because they have always been number one in bringing new technologies to the industry starting back in the early 90’s when they first introduced the automated booking system and recently with the new additions of their Oasis-class ships (Royal, 2012). The competitive pressure and risk involved scored low because of the nature of the business since all cruise lines have to fiercely compete with each other for the cruising population of 16 million as reported in 2011 (Cruise Market Watch, 2011). The Industry Position (IP) factors included ease of entry into the market, growth potential, profit potential, and access to finance and Royal Caribbean scored a +4.50. The growth and profit potential factors scored very high because the industry is expected to grow by 5.6% in 2012 with a total market estimate of $34.1 billion (Cruise Market Watch, Nov. 2011). The access to finance factor scored high as well because with the potential industry growth, banks have been lending money as was evident with Royal Caribbean with its two recent ships that are being built and Carnival’s order of ten ships (Tucker, 2010) The SPACE matrix conducted on Royal Caribbean positions the company at +2.75 on the X axis and +1.25 on the Y axis putting the company at the “Aggressive” quadrant. Royal Caribbean is in a good position to be able to adopt an aggressive growth strategy since the company is operating in an attractive and stable industry that is expected to continue to grow.

Strategy Selection

Royal Caribbean’s Internal-External Matrix, recommended a “Hold and Maintain” strategy, while both the Grand Strategy Matrix and the SPACE Matrix recommended a more aggressive strategic plan. After careful analysis, a Quantitative Strategic Planning Matrix was prepared using the strategic alternatives of market development, market penetration, and product development. Market development, which would require an action plan centered on introducing the cruise line into new geographic areas, received a QSPM score of 7.63. Market penetration, which would require an action plan centered on increased marketing efforts, received a score of 7.89. Finally, product development, which would require an action plan centered on improving present products and services, received a score of 5.79. The most economical strategic plan for Royal Caribbean, LTD would be a market penetration strategy. Increased marketing would center on such topics new ports of call, the lines safety and security commitment, and the company’s dedication to environmental issues. Given the cruise industry’s growth potential and expanding markets, Royal Caribbean also has unprecedented opportunities for market development. It is therefore recommended that Royal Caribbean pursue the dual strategy of market development and penetration.
Action Plan

Human Resources Action Plan

The Human Resources action plan will center around three core areas: • Staffing and training needs. • Cultural development needs. • Labor regulation issues. In order to achieve its goals of market development and penetration, Royal Caribbean will need to invest heavily in additional staff and training. As marketing intensifies and new markets are opened, Human Resources will need to attract and train additional workers. It will be vital that the company establish incentive programs to assure a mixture of well seasoned workers to take on the new assignments in unfamiliar destinations. As with any strategic change, Human Resources will need to assure that employees understand, trust, and commit to the new strategic plan. It will be vital to engage in team building exercises to assure implementation success. As the Maritime Labour Convention gains global acceptance, it will be imperative that Human Resources closely monitors labor standards, policies and procedures to assure that the implementation of the strategic plan is not heeded by labor regulation issues. (Terry, 2010)

Implementation Activities and Schedule:

The following is a list of the Human Resource implementation activities and schedule. • Work with global hiring partners to recruit experienced staff. This work must begin immediately to assure that staff is trained and ready to take on new assignments. • Set up employee incentive plan for experienced staff members to take on new assignments. This work will start out as a preliminary work survey to gauge interest in new assignments. Once interest is gauged an incentive committee can design a program to roll out approximately three months before new assignments are to begin. • Hold a series of strategic implementation conferences designed to motivate and build excitement for the company’s new strategic direction. This activity should begin in thirty to sixty days from the adoption of the plan. • Conduct a study of the Maritime Labour Convention’s regulations and their direct impact on the new strategic plan. This activity should begin immediately.

Implementation Risks and Risk Mitigation Strategies:

All of the above implementation activities bring with them the risk of increased operating costs that may lead to loss of profits in the short run. It is imperative that project budgets are developed and closely monitored.

Marketing Action Plan

What is a buyer looking for when they purchase a cruise? If they purchase a Royal Caribbean cruise, they are looking for adventure! As the website says, "This is the Nation of Why not!" With over 22 ships in the Royal Caribbean International brand alone, the choices are endless. With a global market share estimated to be 24% by cruisemarketwatch.com, they are an established global brand and based on the IE matrix their strategy should be to hold and maintain and focus on market penetration and market development. A cruise is considered to be a “shopping” type consumer product which is characterized by the following attributes: • Less frequent purchase involving more planning and comparisons. • Higher prices with selective distribution in fewer outlets. • Promotion includes advertising and personal selling by producer and resellers. (Kotler & Armstrong, 2010, p. 75). With Royal Caribbean currently in the maturity stage with their product life cycle, they continue to reinvent themselves by acquiring state of the art ships and they attempt to convey the value in a cruise with the various amenities offered by each ship. To increase market penetration and market development Royal Caribbean will have to implement strategies that support these goals.

Market Segmentation:

To increase sales in current markets, Royal Caribbean should focus their efforts on increased segmentation of the current market otherwise market penetration and development will not be successful (David, 2011, p. 258). Another benefit of market segmentation according to David are that a company will only need limited resources since mass production, mass distribution and mass advertising are unnecessary, therefore per-unit profits and per-segment sales are maximized (David, 2011, p. 258). The final reason market segmentation is important is that it helps in the development of a firm’s marketing mix, of product, place, promotion and price (David, 2011, p.258). After analyzing Royal Caribbean website, the targeted segments should include singles, families, honeymoon and anniversary couples, married and active and retired and active. Further analysis of each segments needs and benefits shows differentiated marketing can be used to meet their criteria of reaching each of these segments. Royal Caribbean can offer different types of cruises for each segment based on the ports of call, duration, and price and category of stateroom. Market development will also require segmenting the new market in the same way as current markets to determine their needs and benefits.
Marketing Mix: The chosen marketing mix that will support Royal Caribbean’s market penetration and market development strategies will include direct and indirect channels of distribution which includes travel agencies, the Royal Caribbean website and other indirect distributers such as AAA. Since a cruise is considered a shopping product, a selective method of distribution is the best option since it limits the number of outlets where the product is available and also allows for control in the distribution and marketing (Kotler & Armstrong, 2010). The pricing strategy of Royal Caribbean shows there is a cruise for every price point and segment which is beneficial with market penetration and development as it is a viable option for many consumers. Promotion in developing new markets and increasing sales in current markets should involve personal and non-personal channels. Non-personal channels include television, internet, and social networking sites such as Facebook, Twitter and YouTube. Personal channels include travel agencies and wholesale distributers. These channels are the best way to show off the product, which for Royal Caribbean are innovative ships that offer something for everyone. With this marketing mix, Royal Caribbean can focus on expanding into international markets while also increasing sales in North America.

Implementation Activities and Schedule:

The strategies that Royal Caribbean will focus on of market penetration and market development will best be implemented with the following goals: • Expansion into Australia and Asia. • Commence intensive marketing in new markets and current markets. • Revitalizing older ships to features some of the amenities of newer ships.
The best time to implement expansion into different markets will be the high travel season for each market to make the most of marketing efforts. In order to revitalize older ships and not lose revenue from taking them out of commission, they should make sure they have a substitute that will be able to take over the itinerary of the ship in dry dock.

Performance & Evaluation:

Performance and evaluation of the efforts implemented by Royal Caribbean can be analyzed measuring the increase or decrease in sales and revenues. Though this will only give a fraction of the current state. By developing a revised EFE Matrix you can determine how effective the strategies Royal Caribbean chose have been in response to the opportunities and threats determined by the initial EFE (David, 2011, p. 291). The revised IFE Matrix should focus on the strengths and weaknesses of any changes made to the internal structure of the company including management, marketing, finance (David, 2011, p. 291).

Implementation Risks and Risk Mitigation Strategies:

The implementation risks Royal Caribbean may face include competition under cutting their pricing in an attempt to be the better value. They may also face increased costs based on the new markets they chose to enter which will reduce their profits. Once they revitalize some of their older ships, they do risk losing their investment in the rehab if public interest in the ship is less then newer ships they and those of other competitors have. To mitigate these risks, Royal Caribbean will have to make sure they have analyzed the market for costs and potential threat of competitors entering the market. To put ship back in service they need to make sure they place it in a market where it will they will make a significant return on investment.

Financial Action Plan

In the short run, early 2012, Royal Caribbean needs to conserve resources and brace themselves for possible low bookings due to the Concordia Crash. Once the situation has stabilized there are a few factors Royal Caribbean will need to focus on financially: • Investing in updating current fleet and continue using resources for ships currently under construction. • Work towards using more company resources and capital to finance operations as opposed to debt. • Work toward raising gross profit margin in the future. • Begin to make provisions for possible closing of tax provision in the United States. Investing resources to update the current fleet, and finish construction on currently contracted ships is imperative to remain competitive with Carnival and other cruise lines. Such updates should include logistical equipment, safety equipment, updates to furnishings, and making the fleet more run more efficiently. In order to do this, Royal Caribbean needs to try and find ulterior ways to finance these projects. They have the highest debt exposure of all their major competitors which brings much risk to the company and their shareholders. They either need to look for additional investors, or begin to use capital to fund these projects. Once the fleets have been updated, Royal Caribbean then needs to focus on increasing their profits. Right now they have the lowest gross profit margin of their major competitors. There are a couple of ways this can be done, and that is to increase revenues, decrease expenses, or a combination of both. The most logical method in this case would be to use a balanced combination of both. First, they should look at increasing revenues through expansion efforts in Southern Europe, Asia and Australia where there are double digit travel growth rates. They could also increase their push for consumers to purchase their onboard options, and through their customer loyalty programs. Costs will be harder to reduce, especially with the current high fuel prices. Royal Caribbean should try to negotiate better commission rates, and port rates. They should also look at the profit margin they are receiving for their onboard activities and food. If the relationship is not cost effective, then they should look at increasing the price for these items. Another important item they should begin to look at is the potential for beneficial tax provisions to be removed in the Untied States. As of now cruise lines are able to take advantage of a provision that allows them to incorporate in a foreign country but operate their headquarters in the Untied States and not pay income taxes. With the outcry from US citizens to close corporate “loopholes,” it is very possible this provision will be removed, leaving Royal Caribbean exposed to income taxes they have not had to pay in the past.

Performance & Evaluation:

The performance of this financial plan will be evaluated through the financial statements. Initially Royal Caribbean would expect a decrease in revenues while absorbing the effects of the Concordia disaster. Once the situation stabilizes they would expect to see a decrease in gross profits while the ships are being revitalized and construction is being finished. When construction is finished Royal Caribbean should begin to see an increase in their gross profit margin when they implement their new pricing and cost strategy. If the gross profit margin does not increase, or if it decreases then it should be determined that some or all of the new structure has been ineffective.

Implementation Risks and Risk Mitigation Strategies:

As with any change there is great risk for failure. There is the chance that the renovations and newly constructed ships do not produce an increased revenue or cost more than anticipated. To limit this risk, Royal Caribbean needs to perform extensive market research to figure out where in the market they can expect to receive the greatest return on their investment in their newly renovated and newly constructed ships. There is also the risk that the new pricing and cost reducing strategies will not be well received by travelers and vendors and could deter them from traveling or marketing Royal Caribbean. Great research must also be performed when making decisions about the consumer’s willingness to pay for the new pricing structure, and the vendor’s willingness to receive lower commissions. Also, much research needs to be conducted to compare competitors pricing structures to Royal Caribbean’s new pricing structure, in an effort to ensure the new pricing plan is not too far fetched.

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