The U.S. and the European
cruise industry
a comparative study
by
Mareike L. Hilbig
Msc International Business and Management July 2009
Rijksuniversiteit Groningen
Faculty of Economics and Business
Supervisor: Drs. Stek, H. C.
ABSTRACT
This thesis comprises a comparative industry analysis of the U.S. and European cruise industry. The extent to which the two industries show differences concerning their level of competition is researched. Porter’s Five Forces Model served as the theoretical framework. Profile charts of both cruise industries derived from detailed analyses, which revealed that the U.S. and European cruise industry only differ to a marginal extent.
TABLE OF CONTENTS
Referent: drs. Vries, R. W. de ... 1
ABSTRACT ... 2
This thesis comprises a comparative industry analysis of the U.S. and European cruise industry. The extent to which the two industries show differences concerning their level of competition is researched. Porter’s Five Forces Model served as the theoretical framework. Profile charts of both cruise industries derived from detailed analyses, which revealed that the U.S. and European cruise industry only differ to a marginal extent. ... 2
Key words: comparative industry analysis; level of competition; Porter’s Five Forces Model; cruise industry. ... 2
TABLE OF CONTENTS ... 3
LIST OF TABLES, FIGURES, AND GRAPHS ... 5
CHAPTER 1 - INTRODUCTION ... 6
INTRODUCTION ... 6
RESEARCH OBJECTIVE ... 6
CHAPTER 2 – RESEARCH DESIGN ... 10
RESEARCH QUESTION ... 10
CHARACTERISTICS OF BOTH CRUISE INDUSTRIES ... 11
Characteristics of the U.S. cruise industry ... 11
Characteristics of the European cruise industry ... 12
Type of cruising ... 14
Cruise categories ... 14
Flag of registration ... 15
OUTLINE ... 16
CHAPTER 3 – THEORETICAL BACKGROUND ... 18
LITERATURE REVIEW ... 18
PORTER’S FIVE FORCES MODEL ... 22
Threat of new entrants ... 22
Threat of substitutes ... 24 Threat of buyers ... 25 Threat of suppliers ... 27 Industry competitors ... 28 Summary ... 29 CHAPTER 4 - METHODOLOGY ... 30
DATA COLLECTION AND DATA QUALITY ... 30
SAMPLE SELECTION ... 32
DATA ANALYSIS ... 33
CHAPTER 5 – FINDINGS U.S. CRUISE INDUSTRY ... 36
U.S. CRUISE INDUSTRY ANALYSIS ... 36
Threat of new entrants ... 36
Threat of substitutes ... 46
Threat of buyers ... 48
Threat of suppliers ... 55
Industry competitors ... 59
CHAPTER 6 – FINDINGS EUROPEAN CRUISE INDUSTRY ... 66
EUROPEAN CRUISE INDUSTRY ANALYSIS ... 66
Threat of new entrants ... 66
Threat of substitutes ... 74
Threat of buyers ... 75
Threat of suppliers ... 78
Industry competitors ... 81
CONCLUSION - COMPETITIVE BEHAVIOR OF THE EUROPEAN CRUISE INDUSTRY ... 85
CHAPTER 6 - CONCLUSION ... 87
COMPARISON - COMPETITIVE BEHAVIOR U.S. AND EUROPEAN CRUISE INDUSTRY ... 87
ANSWER TO THE RESEARCH QUESTION ... 88
IMPLICATIONS FOR MANAGEMENT ... 91
IMPLICATIONS FOR ACADEMIA ... 92
FUTURE RESEARCH ... 92
LIMITATIONS ... 93
REFERENCES ... 95
Internet references ... 95
LIST OF TABLES, FIGURES, AND GRAPHS Table 1: U.S. cruise companies
Table 2: U.S. cruise market share in 2009 Table 3: European cruise companies
Table 4: European passengers on board of cruise ships 2006-2008 Table 5: List of entry barriers according to Porter (1985)
Table 6: List of employed entry barriers
Table 7: Threat of substitutes according to Porter (1985) Table 8: List of employed threats of substitutes
Table 9: Determinants of buyer power according to Porter (1985) Table 10: List of employed determinants of buyer power
Table 11: Determinants of supplier power according to Porter (1985) Table 12: List of employed determinants of supplier power
Table 13: Rivalry determinants according to Porter (1985) Table 14: List of employed rivalry determinants
Table 15: Cruise industry companies Table 16: Three-point scale
Table 17: Original costs U.S. cruise ships
Table 18: Total population 27 European countries Table 19: Population projection 27 European countries Figure 1: The elements of industry structure
Figure 2: Profile chart ‘threat of new entrants’ – U.S. cruise industry Figure 3: Profile chart ‘threat of substitutes’ – U.S. cruise industry Figure 4: Profile chart ‘threat of buyers’ – U.S. cruise industry Figure 5: Profile chart ‘threat of suppliers’ – U.S. cruise industry Figure 6: Profile chart ‘industry competitors’ – U.S. cruise industry Figure 7: Profile chart ‘U.S. cruise industry’
Figure 8: Profile chart ‘threat of new entrants’ – European cruise industry Figure 9: Profile chart ‘threat of substitutes’ – European cruise industry Figure 10: Profile chart ‘threat of buyers’ – European cruise industry Figure 11: Profile chart ‘threat of suppliers’ – European cruise industry Figure 12: Profile chart ‘industry competitors’ – European cruise industry Figure 13: Profile chart ‘European cruise industry’
CHAPTER 1 - INTRODUCTION
INTRODUCTIONComparative studies of geographically distinct industries have been numerously conducted. In the process, the researchers either focused on a comparison of historic developments or on one specific aspect that could be different between the two industries. However, it is also feasible to conduct a comparative study on the levels of competition in two industries, thereby focusing on a broader scope rather than on a particular facet like for example customer satisfaction, quality management practices, or performance.
This thesis can be regarded as a comparative study of the U.S. and European cruise industry concerning their different competitive behavior. The purpose of a comparative study on the level of competition, or in other words on the competitive behavior of the two industries, is to provide insights into the reasons why two geographically distinct industries, belonging to the same main industry, reveal differences.
Previous research on industry structure and the resulting conclusions on the level of competition have only been conducted for one industry at the time. No comparative studies regarding this topic could be retraced. Consequently, comparative studies have also not been performed for the U.S. and European cruise industry, again leaving possibilities to fill a literature gap and provide information to academia and management. Theoretical frameworks how to perform an industry analysis are available.
The conclusion of the thesis will indicate to what extent the competitive behaviors of the two industries differ. Moreover, I interpret the differences and attempt to explain the reasons for these differences. The results of this research show management the industry structure of two cruise industries. With this information they can position their cruise company better concerning the predominating competition to reach high profitability levels. Furthermore, this study is also of relevance to academia. The methodology employed in this thesis reveals the applicability of the model used and will provide researchers with an example of comparative industry analyses.
The purpose of this thesis is to conduct two industry analyses and compare them. As mentioned above, previous research focused on one particular aspect when describing or comparing industries. The topic of comparing industries regarding their distinct competitive behavior has so far been underexposed. An industry analysis has been defined by McGee, Thomas, and Wilson as “the analysis of assets, resources and capabilities that set out the basic economic conditions under which firms collectively operate (the ‘industry context’) and which condition their individual abilities to create distinctive positions in their industries” (2005: 148). It can therefore be stated that an industry analysis is conducted to research the factors that influence the profitability of the industry. (Porter, 1980)
In order to avoid misunderstandings the term ‘industry’ will be defined as well. Porter has defined the ‘industry’ as “the group of firms producing products that are close substitutes to each other.” (1980: 5) As this definition does not draw industry boundaries, he added that “any definition of an industry is essentially a choice of where to draw the line between established competitors and substitute products, between existing firms and potential entrants, and between existing firms and suppliers and buyers” (1980: 32).
The industry chosen for this research is the cruise industry. The fact that little previous research has been conducted in this service industry as well as personal reasons has led to this choice. The commercial cruise industry as it is known today only developed about 40 years ago; it is therefore a relatively new industry that has not yet gained as much attention as other industries. (Klein, 2005)
Referring back to the above mentioned definition of ‘industry’ the cruise industry is defined as a service industry encompassing cruise companies that offer cruise vacations to people on board of cruise ships.
scope the cruise industry can be considered to be part of the tourism industry, however, it is also regarded to be an industry on its own. (Dowling, 2006)
In order to define the industry boundaries, I am only referring to coastal, ocean and world cruises when pointing to the cruise industry. The cruises which are considered to be nature expeditions, sail-cruises or freighter travels will be excluded. The difference lies in the desire of the passengers. The people choosing the first category demand a vacation on a large cruise ship with an entertainment program. The guests travelling in the second group do not only choose different types of boats, expedition boats, sailing boats and freighters, but also do not focus on the resort character of the coastal, ocean and world cruises. (Ward, 2008)
Furthermore, I limit the cruise industry geographically to the United States of America and Europe. These two areas are the best developed of the cruise industry. Although the rest of the world is not included in my analysis it does not mean that it does not exist. It has been excluded because the cruise industry has its roots in the line service between Europe and the United States of America.
First analyses of these geographic regions have revealed that it is possible to refer to two different industries; the U.S. cruise industry and the European cruise industry. Differences in the size of the two industries concerning the number of companies competing and ships sailing, as well as the historical growth of the geographically different industries have led to the confirmation that I can refer to two different industries; the U.S. and European cruise industry. Moreover, another aspect is of importance to both industries. As described above, cruise ships mostly do not sail under the flag of the country the cruise company has its headquarter in. Due to benefits that will be described below companies register their cruise ships in countries that function as open ship registries. The country the cruise ship consequently belongs to has no influence on the geographical limits set for the U.S. and European cruise industry. The headquarter of the cruise company defines to which cruise industry the company belongs. The cruise company cannot be considered Liberian just because the cruise ships belong to that country. I have drawn this industry boundary because cruise companies sail ships belonging to several different open registries. Princess
Cruises for example sails ships
cruise ships were to define the belonging of a cruise company to a cruise industry, the company would show several nationalities, thereby complicating the analysis while taking it to another level.
The U.S. cruise industry consists of companies that are headquartered in the United States of America. (Coleman et al, 2003) The area of sailing and the flag of registration the ships are sailing are of no importance to this definition. The same applies for the European cruise industry. Europe is defined as the 27 member states of the European Union plus Norway and Switzerland.
Due to the fact that there is a difference between the U.S. and the European cruise industry it has become the goal of this thesis to research the differences between the two industries. This will be done with the help of theoretical tools used for industry analysis.
CHAPTER 2 – RESEARCH DESIGN
RESEARCH QUESTIONFollowing the illustration the research question will be as follows:
‘To what extent do the U.S. and European cruise industry differ in their level of competition?’
CHARACTERISTICS OF BOTH CRUISE INDUSTRIES
Both the U.S. and European cruise industry will be characterized shortly. Furthermore, different types of cruising will be elaborated, as well as cruise categories and issues arising from the flag of registration. These distinctions apply to both categories.
Characteristics of the U.S. cruise industry
According to Wahlstrom (2009a), in 2009 21 cruise companies are listed in the U.S. cruise industry operating a total of 143 ships with a total capacity of 244,936. Table 1 indicates the U.S. cruise companies and the number of ships they operate. When analyzing the industry structure it becomes apparent that the biggest players of the industry will comprise 91% of the shares of the U.S. market in 2009. Table 2 shows that Carnival Cruise Lines has a 55% market share, whereas Royal Caribbean Cruise Lines operates a 26% share. These companies operate the types of cruising mentioned above. Chapter 4 will show how this sample was generated.
Table 1: U.S. cruise companies
Cruise Line headquartered Number of Cruise Line headquartered Number of
in the U.S.A. ships in the U.S.A. ships
Carnival Cruise Lines 23 Regent Seven Seas Cruises 5 Princess Cruises 17 Oceania Cruises, Inc. 3
Holland America Line 14 Crystal Cruise 2
Cunard Line, LTD 2 Silversea Cruise 6
Seabourn Cruise Line 4 Imperial Majesty 1
Royal Caribbean 22 Cruise West 9
Celebrity Cruises 10 Discovery 1
Azamara 2 Windstar Cruises 3
Norwegian Cruise Line 11 Pearl Seas Cruises 2
MSC Cruises 2 Seadream Yacht Club 2
Disney Cruise Line 2 Total 143
Source: Wahlstrom (2009a)
Carnival Corp. 55% Royal Caribbean 26% NCL 10% Disney 2% MSC 2% Other 5% Total 100% Source: Wahlstrom (2009a)
Looking closer, Carnival has this large share because the company consists of ten different individual firms. Five of them are U.S. American, the other half belongs to the European cruise industry. Owning 55% of the U.S. cruise market in 2009, the Carnival Corporation can be considered to be the market leader. (Wahlstrom, 2009a)
Furthermore, Royal Caribbean Cruise Lines is made up of three U.S. American and three European cruise companies. The structure of the Star Cruises Group is slightly different. One European, one U.S. and one Malaysian cruise company operate together. (Full, 2009) $38 billion were generated by the U.S. cruise industry in the whole world in 2007. In 2008 this number amounted to $24.9 billion; this results in a decline of 9.5%. Moreover, 34 million U.S. Americans intend to cruise within the next three years. Another 20% of passengers have to be added to that figure as also non-American citizens book journeys on ships operated within the U.S. cruise industry. In 2008, 94% of all cruisers were satisfied with their vacation on board, 44% was even extremely satisfied. “Although the global economic crisis may have an impact on consumer intentions, these statistics give the cruise industry confidence that demand for cruising will continue to be strong” (Cruise News, 14.01.2009).
Characteristics of the European cruise industry
Referring to the same source that was used above (Wahlstrom, 2009a), table 3 shows that 18 cruise companies are headquartered in Europe in 2009. However, of these 18 European companies, seven belong to either of the U.S. American Carnival or Royal Caribbean group as defined above.
Cruise Line headquartered in Europe Country Part of a U.S. company Number of ships Costa Cruise Lines Italy Carnival
Corporation
14 P&O Cruises UK Carnival
Corporation
8
AIDA Germany Carnival
Corporation 6
Ibero Cruises Spain Carnival Corporation
3
Ocean Village UK Carnival
Corporation
2
Pullmantur Spain Royal Caribbean 5
CDF France Royal Caribbean 1
Louis Cruise Lines Cyprus - 8
Thomson UK - 6
Hurtigruten Norway - 13
Fred Olsen Cruise Lines Norway - 5
Hapag-Lloyd Germany - 4
Saga Cruises UK - 2
All Leisure Holidays UK - 2
Easy Cruise UK - 2
Delphin Germany - 1
Orient UK - 1
Ponant Cruises France - 3
Source: Wahlstrom (2009a) and the companies’ homepages
These 18 European cruise companies operate a total of 102 ships with a total capacity of 138,147 passengers. Furthermore, by 2010/2011 Costa, P&O, AIDA, and Ponant will operate an additional total of six ships. The new ships increase the total capacity of the European cruise industry by 10,950. (Wahlstrom, 2009b)
Table 4: European passengers on board of cruise ships 2006-2008 Passengers (000s) 200 6 200 7 2008 % change 2007-2008 United Kingdom 1,2 1,34 1,48 11 Germany 705 763 907 19 Italy 517 640 682 6 Spain 391 518 497 -4 France 242 280 310 11 Scandinavia (incl. Finland) 62 94 123 31 Benelux 64 82 92 11 Switzerland 56 64 65 1 Austria 44 52 59 14 Portugal 18 20 28 41 Other 105 155 183 17 Total 3,41 4 4,42 10 Source: PSA (16.03.2009) Type of cruising
The cruise industry can be subdivided into categories that show different types of cruising. These groups all serve different demands within the cruise industry. Ward (2008) distinguished between cruising for romantics, families and physically challenged, but he also elaborately described the different types of cruises passengers can choose from. The cruise critic highlights the differences between “nature expeditions, sail-cruise ships, coastal cruising, freighter travel, ocean crossings, and round-the-world voyages” (Ward, 2008: 91). As mentioned above, I focus my study on the cruise companies that serve coastal, ocean and world cruising; these can be considered to be the industry boundaries. (Porter, 1980) These have been chosen because the companies part of the sample selection mentioned later all operate in one of those. If all other ways of cruising were to be included into the industry analysis different markets would be mixed. Customers demanding a nature expedition or river cruise have different desires than the guests on coastal, ocean or world cruises. (Berger, 2004)
Cruise companies can take different positions within the cruise industry. These can be described as ‘destination’, ‘contemporary’, ‘luxury’ and ‘premium’. (Dickinson and Vladimir, 2007) The categories ‘contemporary’, ‘luxury’ and ‘premium’ are ranked according to their price level. The levels range from cheap and more basic to more luxury to high quality, the best restaurants and good service. The category ‘destination’ serves guests who are interested in smaller, more exquisite ports who are not available by large ships.
Flag of registration
Ships are mostly registered under a different flag than the flag of the home country of the cruise company. These countries operate open registries. “Under their flags of convenience, they [the cruise ships] operate as little floating pieces of places that are far less stringently administered than the United States” (Garin, 2005: 183) or any European country. Although the ships are registered in one of these countries, companies are merely present by post office boxes or a name plate at a lawyer’s office in that country. “FOCs [flags of convenience] are the product of a global economy in which money talks, preferably without interference from governments and other annoying impediments to doing business” (Garin, 2005: 183). When registering cruise ships in other countries the ships no longer have to adhere to U.S. or European national law. The national law of the registration country is enacted on board of the ship. Income and corporate taxes for the revenues generated with the help of the cruise ships are paid to the open registries, no longer to the cruise company’s home country. The amount of taxes paid is low. (Garin, 2005) Technically seen, the cruise companies only earn money with the operation of the cruise ships. However, these cruise ships belong to another country. The cruise company itself does not generate any money that can be affected by taxes. Labor laws are compatible to the country of registration. Furthermore, any incidents happening on board the ships are subject to the law of the country of registration.
manning, employment and related requirements” (Ademuni-Odeke, 1998: 25). Concerning the cruise industries researched, Panama, the Bahamas, Bermuda, Italy, Spain, the U.S.A., the UK, Gibraltar, Malta, and the Netherlands are of importance. Only one ship is registered in the United States of America, while 49 are registered in a European country.
“The use of flags of convenience is generally traced back to the use of the Spanish flag by English merchants in, order to avoid Spanish monopoly restrictions on trade with the West Indies” (Febin, 2007). More recently, the flags of convenience system was introduced by the Americans in World War II. While the U.S.A. wanted to supply Great Britain with weapons and munitions it did not want to lose its neutral position before the Germans. The U.S.A. had close historical links to Panama (building the Panama Canal) and Liberia (freed U.S. slaves moved there) and flagged their ships out to those countries to appear neutral before the Germans. Herewith, Panamanian and Liberian ships supported the British, and the Americans were officially not involved. The event of Pearl Harbor made the law obsolete because of that moment U.S. American ships were fighting, “but the law stayed on the books” (Garin, 2005: 184).
OUTLINE
analysis of the European cruise industry. These chapters provide the information necessary to answer the research question: ‘To what extent do the U.S. and European cruise industry
differ in their level of competition?’ Chapter 7 ends the thesis with a comparison of the two
CHAPTER 3 – THEORETICAL BACKGROUND
LITERATURE REVIEWIndustry analyses have been of importance to management due to the insights on the profitability of the industry the companies are operating in or are planning to enter. (McGee, Thomas, and Wilson, 2005) Academia shows interest in industry analyses because of the different competitive behaviors of separate industries, as basis for strategic management. (Thompson and Strickland, 2003; McGee, Thomas, and Wilson, 2005) The factors that have led to a particular state can be different across industries and each individual industry will show its own characteristics. I research whether the U.S. and European cruise industry differ and what factors have led to those differences.
Before I chose the research topic it was of importance to find out what other researchers had already written about the topic of comparative industry analyses and whether they were conducted at all. Furthermore, research on previously written papers on the cruise industry could contribute to my thesis, or to my knowledge about the cruise industry, and could show different methodologies employed. Several researches concerning the cruise industry have been conducted. Dowling (2006) has collected more articles in his book.
insights into a cruise industry analysis. Furthermore, Wie (2004) wrote an article titled ‘Open-loop and closed-loop models of dynamic oligopoly in the cruise line industry’. His concentration on competition again showed me that the focal points of our studies differ. These three articles all focused on one particular aspect of industry analysis; mergers, price discrimination, and oligopoly analysis. Although the articles and this thesis as well focus on the cruise industry, all research different topics. The analysis of the three papers has provided me with additional information on the cruise industry but did not support me in my effort to compare the U.S. and European cruise industries.
Instead of researching the U.S. and European cruise industry on a specific factor, I will conduct research on a broader level. As mentioned above, industry analyses based on a theoretical framework of neither the U.S. nor the European cruise industry have been conducted, yet.
My research on the topic of (comparative) industry analyses has revealed a theoretical model that is mainly used. Furthermore, several papers written on the topic of industry analysis have been found. Within the area of strategic management, industry analyses are applied. The most famous and most widely used example of industry analysis is M.E. Porter’s Five Forces Model developed in 1980. It appears that researchers conducting an industry analysis employ this particular model of industry structure analysis. (e.g. Hussey, 1992; Bentivogli, Hinterhuber, and Trento, 1994; Siaw and Yu, 2004) Furthermore, when referring to strategic management literature, Porter’s Five Forces Model is the framework mentioned when it comes to the external environment analysis necessary for strategy formulation. (e.g. Bowman, Singh, and Thomas, 2002; Mintzberg et al, 2003; Thompson, Strickland, and Gamble, 2005; McGee, Thomas, and Wilson, 2005; Barney, 2007) With the help of this model the industry structure is researched which provides insights into the competitive behavior of the industry.
The extent to which one or more of the forces are of importance and might influence the industry dominantly, determines the level of competition. (Porter, 1980) Figure 1 shows the model and its characteristics.
Figure 1: The elements of industry structure
Source: Porter (1985)
The strength of each of these five forces is determined by a number of determinants which will be defined later.
beyond the behavior of current competitors. The state of competition in an industry depends on five basic competitive forces” (1980: 3).
Three examples of researchers employing Porter’s (1980) model highlight the diversity and appropriateness of its use. I studied previous employments of this theoretical model in order to gain insights into its application and possible weaknesses. According to my study, the researchers face some problems when the result of the analysis has to be stated in the end.
First, Hussey (1992) illustrated concepts of industry and competitor analysis. The focus of his study lay on the compilation of the industry structure, thereby concentrating on a competitor profile. From the perspective of his own management consultancy company, his aim was to find out what his own company should do to overcome the competition in the industry and how assignments can be won. Within his research he focused on only three aspects of Porter’s Five Forces Model. Although Hussey (1992) did neither state a detailed industry analysis nor an elaboration of the strength of each force, he nevertheless mentioned the benefits that can be obtained from the analysis. These are, however, descriptive and no explanation how he derived at these outcomes was provided.
Second, Bentivogli, Hinterhuber, and Trento (1994) have conducted an industry analysis of the watch industry, thereby focusing on the Swiss watch industry and the Swiss company Swatch. The analysis showed how and why the competitive advantages shifted in the last decades between geographically different watch industries. The authors have employed Porter’s Five Forces Model. Although descriptions of each force have been delivered, no final conclusion concerning the watch industry has been drawn. Only the strategies of the companies operating in the watch industry to reach competitive advantage have been illustrated. The authors did not mention how they reached these conclusions.
each of the five forces; however, the authors only drew conclusions after the description of the forces, not going into detail about the extent and weight.
In all three cases the problem seems to be the transformation from data to a conclusion about the force. Thus, the analysis of previous research has given me insights into weaknesses of the model I have to deal with. Oral stated that Porter provides “more a checklist of factors, with few measurement guidelines” (1993: 10). The above mentioned authors must have faced this problem as well. Despite this weakness of the model, I employ it in this research. In the following the criticism will be dealt with so that it can nevertheless be successfully used for the comparative cruise industry analysis.
The strength of the influence of each force on the competitive behavior of the cruise industries is determined by the influence of each determinant that makes up the force. Using Porter’s Five Forces model requires qualitative data to be filled into the determinants. This information has to be stated in such a way that it defines its influence on the force. This influence has to be measured objectively so that the reliability of the research is guaranteed. As with other external environment analyses a profile chart will be used to depict the influence of the separate determinants on the force itself. (Hax and Majluf, 1983) This decision making tool will be elaborated below.
In the following the five forces and the according determinants will be introduced. It is of importance to notice that Porter (1980) did not note whether his theoretical model is applicable to product or service industries. As the cruise industry is a service industry, the number of determinants per force has been adapted to it and to the cruise industry in particular. By adapting the model to the needs of the cruise industry, the Five Forces Model is tailor-made to the U.S. and European cruise industry.
PORTER’S FIVE FORCES MODEL
As the title already indicates, the model consists of five different forces which combined have an influence on the competitive behavior of the industry. In the following paragraphs these different forces will be introduced.
The first of the five forces that will be discussed is the threat of new entrants. “New entrants are firms that have either recently begun operations in an industry or that threaten to begin operations in an industry soon” (Barney, 2007: 58).
The threat of new entrants is analyzed from the perspective of companies that are not yet part of the industry. If the entry barriers are low new companies can enter the industry without major problems and are able to threaten the long term profitability of the existing companies. Furthermore, an increased number of competitors imply an increased level of competition. “Barriers to entry are attributes of an industry’s structure that increase the cost of entry” (Barney, 2007: 59). Mintzberg, Ahlstrand, and Lampel refer to the industry as a club “in which firms gain admittance by overcoming certain ‘barriers to entry’ ” (1998: 100). If the barriers are high, the club is cozy and competition appears to be friendly. However, when the barriers are low, everybody can enter the club; the competition will be high. Table 5 shows the list of entry barriers Porter (1985) considered to be of importance. In order to not provide an extensive repetition of Porter’s (1980) model, the descriptions of each determinant are interwoven into the paragraphs on the findings concerning the determinants.
Table 5: List of entry barriers according to Porter (1985) Economies of scale
Product differences Brand identity Switching costs Capital requirements
Access to distribution channels Absolute cost advantages Proprietary learning curve Access to necessary inputs Government policy Expected retaliation
Source: Adapted from Porter (1985)
the cruise industry which is a service industry. The only costs that could be defined that way are lost discounts due to disloyal bookings. However, these are probably more opportunity costs. Second, belonging to the aspect of ‘absolute cost advantages’ the issue of ‘proprietary learning curve’ is neglected as well. Although experiences from new entrants regarding the shape and timely development of their learning curve are of interest to other future entrants, due to a lack of data and inside information this determinant was neglected. This determinant is, however, of importance.
All the other determinants are employed within this research as they are of importance to the cruise industry and data is available. The factors are shown in table 6 and highlight the threat of new entrants into the existing industry tailor-made for the U.S. and European cruise industry.
Table 6: List of employed entry barriers Economies of scale
Product differences Brand identity Capital requirements
Access to distribution channels Access to necessary inputs Government policy Expected retaliation
Source: Adapted from Porter (1985) Threat of substitutes
Table 7: Threat of substitutes according to Porter (1985) Relative price performance of substitutes Switching costs
Buyer propensity to substitute Source: Adapted from Porter (1985)
‘Threat of substitutes’ determinants of importance The ‘buyer propensity to substitute’ is erased from the original list when analyzing the U.S. and European cruise industry. This is done as detailed industry analyses concerning the sales revenues of the cruises and possible substitutes cannot be performed. Only the contribution to the economic output of the geographic area is available. Moreover, the attempt to find data on the buyers’ opinions regarding substitutes and whether they prefer substitutes to cruise vacations, failed. Furthermore, it is not feasible to provide data on the switching costs. When referring to switching costs concerning the threat of substitutes, I have to take the possible switch between cruise categories and the switch between the cruise vacation and a different type of vacation into account. As the analysis of the substitutes itself shows that there are no direct substitutes to the uniqueness of cruising no price comparisons are performed. Table 8 shows the determinants used within the analysis of the threat of substitutes.
Table 8: List of employed threats of substitutes Relative price performance of substitutes
Source: Adapted from Porter (1985) Threat of buyers
influence these aspects is determined by several factors. Table 9 shows a list mirroring Porter’s (1985) determinants of buyer power.
Table 9: Determinants of buyer power according to Porter (1985) Buyer concentration vs. firm concentration
Buyer volume Buyer information Price/total purchases Product differentiation Brand identity
Ability to backward integrate Substitute products
Switching costs
Source: Adapted from Porter (1985)
‘Threat of buyers’ determinants of importance Again Porter’s original list of determinants has been modified to fit the analyses of the U.S. and European cruise industries. The determinant ‘buyer concentration vs. firm concentration’ is neglected as this aspect is more appropriate to the product industry than to the service industry. Within the service industry one cannot refer to individual buyers who purchase large portions of a product. Due to a lack of relevance the ‘switching costs’ are not examined as well as the ‘price/ total purchases’ aspect. The economic profit individual cruisers earn is not relevant to this research and is again more suitable for an analysis of a product industry. Moreover, research showed that it is not possible to retrace this data. The seven relevant determinants are shown in table 10 and mirror the amount of power and behavior of buyers.
Table 10: List of employed determinants of buyer power Buyer volume
Buyer information Product differentiation Brand identity
Ability to backward integrate Substitute products
Threat of suppliers
The fourth of the five forces that will be discussed is the bargaining power of suppliers. “We usually think of suppliers as other firms, but labor must be recognized as a supplier as well, and one that exerts great power in many industries” (Porter, 1985: 28). Suppliers are those players in the industry that the companies depend most on. They provide raw material, input, facilities and labor. If those factors stop flowing in, the industry will suffer. “Suppliers can threaten the performance of firms in an industry by increasing the prices of their supplies or by reducing the quality of those supplies” (Barney, 2007: 73). As long as the industry is dependent on the suppliers, the suppliers have a certain amount of power. But as soon as there is an overload of suppliers or a possible threat of backward integration, this power decreases and the suppliers will depend on the client. (Mintzberg, Ahlstrand, and Lampel, 1998). Table 11 shows the list of determinants of supplier power Porter (1985) composed.
Table 11: Determinants of supplier power according to Porter (1985) Differentiation of inputs
Switching costs of suppliers and firms in the industry Presence of substitute inputs
Supplier concentration/ volume
Threat of forward integration relative to threat of backward integration by firms in the industry
Source: Adapted from Porter (1985)
importance of the supplier to the industry show in abstract terms whether the cruise companies are able to easily switch between suppliers and whether the suppliers can easily transfer to other industries. Table 12 highlights the new list of determinants that are of importance for the analysis of the threat of the power of suppliers to the U.S. and European cruise industry.
Table 12: List of employed determinants of supplier power Presence of substitute inputs
Supplier concentration/ volume
Threat of forward integration relative to threat of backward integration by firms in the industry
Importance of industry to supplier Importance of supplier to industry
Source: Adapted from Porter (1985) Industry competitors
The last of the five forces that will be discussed is the intensity of rivalry among existing competitors. All of the previous four determinants of industry structure “converge on rivalry” (Mintzberg, Ahlstrand, and Lampel, 1998: 102). “Rivalry among existing competitors takes the familiar form of jockeying for position – using tactics like price competition, advertising battles, product introductions, and increased customer service or warranties” (Porter, 1980: 17). Table 13 again shows a list of Porter’s (1985) rivalry determinants.
Table 13: Rivalry determinants according to Porter (1985) Industry growth
Source: Adapted from Porter (1985)
‘Industry competitors’ determinants of importance Table 14 shows that some of the previously mentioned factors of Porter’s (1985) original list have been neglected and that one has been added. In terms of the cruise industry one cannot speak of storage costs, therefore this item was deleted. Furthermore, the switching costs are irrelevant again while the aspect of corporate stakes is significant to the cruise industry. Unfortunately, no solid data on this item is retraceable as the corporate strategies cannot be traced. However, six determinants are of importance to the cruise industries and can be supported by data. Additionally, the aspect of ‘new products’ has been added to the list. If there are possibilities to introduce new products, the products will become more differentiated, leading to a decreased level of rivalry.
Table 14: List of employed rivalry determinants Industry growth Capacity Product differentiation Diversity of competitors Exit barriers New products
Source: Adapted from Porter (1985) Summary
Table 6, 8, 10, 12, and 14 indicate the determinants that will be researched. It is relevant to avoid solely a description of the single determinants which leads to a subjective listing of facts belonging to each force. Rather than drawing a descriptive conclusion, a thorough analysis has to be performed that indicates the positive or negative effect of each determinant on the force. As mentioned above, this is realized with the help of profile charts.
CHAPTER 4 - METHODOLOGY
DATA COLLECTION AND DATA QUALITY
The aspects of authenticity, representativeness, reliability and validity have to be mentioned. The authenticity of Internet sources as well as company homepages, the web pages of organizations associated with the cruise industry and online magazines have to be checked carefully to avoid the use of biased homepages that might falsify data. Representativeness of the research might be more concerned with survey research and sampling. However, when the outcome of the thesis has to represent the two industries and their specific characteristics I have to ensure that those will be representative and generalizable. (Gobo, 19xx)
Concerning the validity (of data) and the reliability (of methods) the literature contrasts the “generalization about the nature of a process” (Gobo, 19xx: 435) versus the “generalization about a specific group or population” (Gobo, 19xx: 435). “Loosely speaking, ‘reliability’ is the extent to which a measurement procedure yields the same answer however and whenever it is carried out; ‘validity’ is the extent to which it gives the correct answer” (Kirk and Miller, 1986: 19). In this case the validity is guaranteed as the competition levels will be measured by the five forces and these forces will be well defined and analyzed. The reliability of the analysis depends on the year of analysis and the interpretations of the researcher made with the help of the decision making tool mentioned in the end. External factors like the economy, unemployment rates, and number of tourists or laws on monopolistic behavior will alter the outcome of the research eventually. No industry is completely stable and fluctuations have to be taken into account.
Porter’s Five Forces Model has been sourced from Porter (1980) and Porter (1985). His books ‘Competitive Strategy’ and ‘Competitive Advantage’ provide the theoretical background that is necessary to understand his model and to transform it in such a way that it can be used for this particular kind of research. In the following used data sources will be introduced. Furthermore, I will elaborate on the authenticity of the sources.
and websites from official cruise associations and U.S. and European institutions have been employed to provide the information necessary for the analysis and comparison of the U.S. and European cruise industry. In order to find, for example, information on corporation constructs, annual reports, press releases and nationalities of companies the homepages of AIDA, Costa, Carnival, Disney, Holland America Line, MSC, TUI, Regent Seven Seas and Royal Caribbean International have been used. There is no need to suspect that these websites are not authentic. Furthermore, to gain knowledge on the cruise industry in general and the U.S. and European cruise industry in particular, I have studied paper magazines like ‘An Bord’ or ‘HANSA’. The authors have built their knowledge on statements, press releases, information from cruise conferences, and papers provided by either the U.S. Cruise Line International Association (CLIA) or the European Cruise Council (ECC). Both have also been used in this research. The associations are the leading of their kind in their geographic area and provide information on market studies, industry profiles and among others, environmental issues. The fact that numerous companies are a member of either of these associations shows that this source is trustworthy.
In order to research the population numbers, the websites of the European Union, the statistics offices of the European Union and the United States of America, as well as the U.S. Census Bureau have been consulted. Information on environmental aspects could also be retrieved from these institutions.
The information necessary for the description and analysis of the determinants belonging to the five forces required a large base of diversified knowledge. Several books written on the cruise industry have been used to gather information. Kludas (2003), Berger (2004), Garin (2005), Klein (2005), Dowling (2006), Dickinson and Vladimir (2007), and Ward (2008) base their outcomes on detailed studies as well as on information gathered from official sources.
a website where professionals review cruise ships and ports. This site was consulted to gain more insights on forward and backward integration. The homepage of ‘Trading Markets’ (2009) has been consulted for the same reason. To research information on ship yards as suppliers to the cruise industry, the homepage of Cruiseserver (2009) was visited. This site belongs to the awarded site of TravelPage (2009), which has been described as a comprehensive and objectively operated resource to cruise lines by multiple leading U.S. American newspapers. Concerning the information on yards it was also of importance to research whether other yards outside the U.S. or European cruise industry where a threat. The credentials and contacts of Seatrade Asia (2009) proved that this site could provide these insights. Moreover, in order to research the characteristics of the European cruise industry, the homepage of Travel Daily News (2009) was consulted. It is a valuable resource for tourism professionals around the world with about 27.410 registered readers. Last but not least, Wahlstrom (2009a, 2009b) provided the sample that is used within this research. For both the U.S. and the European cruise industry a sample size of 21 and 18 cruise companies respectively has been picked. This sample is based on the information provided by Wahlstrom.
SAMPLE SELECTION
choosing for one of the other vacations. An analysis of the cruise industry including the expedition, sail and freighter cruises would mean that a new market had to be included, thereby mixing two different types of markets.
The cruise lines marked in italics are headquartered in Europe, while the others are headquartered in the United States of America. Furthermore, the cruise category has been indicated. The cruise industry exists, according to this definition, of 39 companies, of which 18 are European and 21 are U.S. American.
Table 15: Cruise industry companies
Cruise Line Category Cruise Line Category
Carnival Cruise Lines
Contemporar
y MSC Cruises Contemporary
Princess Cruises Premium Pullmantur Contemporary
Holland America Line Premium CDF Contemporary
Cunard, LTD Luxury Costa Cruise Lines Contemporary
Seabourn Cruise Line Luxury P&O Cruises Contemporary
Royal Caribbean
Contemporar
y AIDA Contemporary
Celebrity Cruises Premium Ibero Cruises Contemporary
Azamara Luxury Ocean Village Contemporary
Norwegian Cruise Line/ Star
Contemporar
y Louis Cruise Lines Contemporary
MSC Cruises
Contemporar
y Thomson Contemporary
Disney Cruise Line
Contemporar
y Hurtigruten Contemporary
Regent Seven Seas Cruises Luxury Fred Olsen Cruise Lines Contemporary
Oceania Cruises, Inc. Premium Hapag-Lloyd Luxury
Crystal Cruise Luxury Saga Cruises Contemporary
Silversea Cruise Luxury All Leisure Holidays Contemporary
Imperial Majesty
Contemporar
y Easy Cruise Contemporary
Cruise West Contemporar y Delphin Contemporary Discovery Contemporar y Orient Contemporary
Windstar Cruises Luxury Ponant Cruises Luxury
Pearl Seas Cruises Luxury
Seadream Yacht Club Destination Total 39
Source: Wahlstrom (2009a)
Hax and Majluf (1983) used a profile chart to determine how much separate factors of the industry analysis influence the overall industry attractiveness. They have focused their research on the attractiveness analysis of the industry as part of the industry attractiveness-business strength matrix. With the help of the tool they have introduced, the influence of each factor on the overall attractiveness can be measured, thereby avoiding subjective conclusions as done by the authors of the three examples mentioned above. With the help of profile charts the influence of each determinant on the force can be determined. Each determinant is graded according to a three point scale. A three point scale has been chosen as a five point scale would leave more room for subjectivity and the reasoning could not be imperviously stated. When a five point scale was employed, the limits between ++ and +, and – – and – needed extra attention and description. As no other research has employed a five point scale and could provide insights into the methodology to be used as a reference, I will stick with the three point scale.
Table 16: Three-point scale - Negative influence on the force N Neutral influence on the force + Positive influence on the force Source: Adapted from Hax and Majluf (1983)
In order to draw conclusions about the two industry analyses and the comparisons between the U.S. and European cruise industry, next the methodology of the process of the analysis and comparison will be highlighted.
As indicated by table 16, first, each determinant per force has to be described and analyzed concerning its influence on the force. It is of importance that it is clearly stated why a determinant received a ‘-’, a ‘N’ or a ‘+’.
A determinant will be graded with a ‘+’ if it has a positive influence on the power of the force. This means that this determinant has a strengthening effect on the force, meaning that because of this determinant the force helps to increase the level of competition in the industry.
If a determinant has neither a positive nor a negative influence on the force, it is graded with a ‘N’. This means that his determinant does not contribute to the characterization of the competitive behavior of the industry.
Second, the number of ‘-’, ‘N’ and ‘+’ per force will be counted. If the ‘-’ outnumber either of the other ratings largely, the force is said to have a negative effect on the level of competition in the industry. This force helps to weaken the competitive behavior of the industry. The level of competition is low.
If the ‘N’ outnumber either of the other ratings largely, the force is said to have no effect on the level of competition in the industry. This force neither enforces nor weakens the competitive behavior of the industry. The level of competition is moderate.
If the ‘+’ outnumber either of the other ratings largely, the force is said to have a positive effect on the level of competition in the industry. These characteristics of this force help to enhance the competitive behavior of the industry. The level of competition is high.
If neither of the rating dominates the force, the one with the most counts characterizes the determinant. However, it will either slightly shift to the negative or to the positive side, depending on the rating that received the second most quantity.
The final step is to characterize the level of competition in the industry as either low, moderate, or high.
CHAPTER 5 – FINDINGS U.S. CRUISE INDUSTRY
U.S. CRUISE INDUSTRY ANALYSIS
The influence of each determinant on the strength of the force is evaluated for the U.S. cruise industry. The influence can either be positive, neutral, or negative. This means that each force will be rated according to the characteristics of its determinants in the end. The composition of the five forces indicates the competitive behavior of the U.S. cruise industry.
Threat of new entrants
The analysis of this force shows whether it is likely for new entrants to overcome the entry barriers to the U.S. cruise industry. The determinants are considered to be the entry barriers. The more negative this force is described in the end, the less likely it is that new entrants enter the U.S. cruise industry.
Economies of scale “Economies of scale refer to declines in unit costs of a product (or
operation or function that goes into producing a product) as the absolute volume per period increases” (Porter, 1980: 7). Economies of scale have been reached when producing another unit of product no longer result in an increase of costs. This determinant is seen as an entry barrier because new companies will either not have the knowledge, the production volume, or the facilities to make use of economies of scale in the beginning. The loss of economies of scale results in competitive disadvantages. Economies of scale can be achieved in for example the marketing, production, and accounting department but also when it comes to brand identity and distribution channels. (Porter, 1980; Barney, 2007)
who “virtually control Alaska large ship cruising, and own hotels, lodges, tour companies and much land-based transportation” (Full, 2009: 29). It becomes apparent that in order to operate a cruise ship and the inclusive tour operations and hotels that guests might demand before and after their cruise, a large machinery of facilities has to be provided. The incumbent firms have the advantage that they have already established an intangible asset concerning their brand name and know-how and are therefore earning substantial economies. They have a cost advantage over new entrants. (Porter, 1980) One downside of this aspect of economies of scale is that the brand linkages can only be made if the cruisers or vacationers are familiar with all products belonging to the company. If this was not the case, the marketing department had to spend money to promote all products and there would be no economies of scale. Therefore, economies of scale concerning brand name linkages level each other out due to the start-up costs and the following savings.
Economies of scale regarding brand name association are not the only factors that might inhibit new entrants. Carnival, for example, focuses on standardization regarding the design and construction of their ships. “It saves on ship design and construction by standardizing its fleet and the furnishings on its ships. And it saves by avoiding costly additions such as rock-climbing walls, and by resisting unnecessary expenditures. [ … ] With growth, Carnival has achieved even greater savings through economies of scale” (Klein, 2005: 21). Due to the fact that all ships look alike, it is easy for onboard staff to switch between ships but it is also easier for the ship yard to construct a new ship. The workers show experience and learning curves because they are familiar with the construction drawings and have already built a similar ship. As new entrants mostly buy elderly ships to start their business and either stretch or refurnish them, the new company cannot make use of the economies of scale of the yard and does not experience the cost advantage. (TUI AG Press and Media, 10.12.2007)
company tries to enter the U.S. cruise industry, this aspect of the determinant is positive. However, the negative effect of this determinant outweighs the positive side.
Due to the outweighing negative aspects of this determinant, it is rated ‘-’. New entrants face cost disadvantages because they need time and money to build up their own business and department. The negative influence of economies of scale on the threat of new entrants means in conclusion, that it weakens the overall strength of this force on the level of competition in the U.S. cruise industry.
Product differentiation “Product differentiation means that incumbent firms possess brand identification and customer loyalty that potential entrants do not possess” (Barney, 2007: 61). New entrants are forced to enter the industry and their specific market with a product that is different from the existing products. The firms have to overcome brand loyalties, others’ customers have to be enticed away.
When referring to product differentiation in the cruise industry the ships and the consequent entertainment offers have to be different from existing ships and concepts. This means that the target group must be different (age, gender, income, marital status) and that the destinations have to cover the desired needs. Furthermore, the ships and their programs have to be distinct from each other. Therefore, the companies come up with different marketing strategies that promote their differentiated products. Norwegian Cruise Lines for example promote their new concept of ‘Freestyle Cruising’, whereas Carnival has introduced ‘Fun Ships’ several decades ago. In order to appeal to all different ages, genders, incomes, and marital statuses ships have to offer routes to different destinations, more single bed cabins or more family rooms and different dining habits. Freestyle cruising deals with the last aspect. The old stereotype of strict dinner timetables, dress codes, restaurants and menus has been transformed. Norwegian Cruise Line has introduced freestyle cruising to provide a new service. Passengers can choose when, where, with whom and how to eat. (NCL Freestyle Cruising Catalogue)
This determinant is rated ‘N’ because new entrants have a difficult time introducing a new product to the cruise industry, while they will not enter the industry with a product that is exactly similar to already existing concepts. If the new products can be differentiated the threat by the new entrants would increase because the new entrant is able to entice away customers with its new program. However, if the new entrant enters with a product that already exists it will just be another new player that has to entice away the well established customer base. (Porter, 1980) All in all, this determinant has a neutral influence on the threat of new entrants. This force has no effect on the level of competition in the U.S. cruise industry.
Brand identity Closely related to the differentiation of products, brand identity is another factor that will take time to develop. Customers and potential clients have to be aware of the new brand, of the new entrant, and have to be attracted to the new firm and its concept. A certain level of quality or standard has to be developed in order for people to identify with the new entrant.
For new entrants to be a serious competitive force they have to develop a marketing strategy and a product that is distinct from others in order to entice customers away from other companies or to attract new first time cruisers. (Thompson, Strickland, and Gamble, 2005) “High brand loyalty means that a potential entrant must commit to spending enough money on advertising and sales promotion to overcome customer loyalties and build its own clientele” (Thompson, Strickland, and Gamble, 2005: 57). This is achieved by creating an identity for the brand.
cruise line maintains the cheapest price. The fourth group, ‘Hostages’ is loyal to the cruise line because there is no viable alternative. The final group in this classification is ‘Guerillas’ who are ‘Apostles’ who have been scorned” (Miller and Grazer, 2003: 78). These groups only evolve if the new entrants have created a brand that the customers can identify with and stay loyal to.
Although it is not possible to divide the U.S. cruising population into the different groups mentioned above, conclusions about brand loyal behavior can be drawn. It cannot be stated whether the cruisers return loyally to the same company they have sailed with before, but it is possible to indicate the cruise category they are choosing repeatedly. According to the 2008 Market Profile Study conducted by the Cruise Line International Association (CLIA, 2008) 77% of destination, 74% of luxury and 79% of contemporary cruisers are repeaters. They sailed more than once in the same cruise category and are returning to the ships in that category. “Contemporary lines attract the largest share of first-timers (40%)” (CLIA, 2008). No information whether they repeatedly book cruises with the same U.S. cruise company could be retrieved.
The U.S. cruise companies are aware of the brand loyal behavior of their customers. Especially old traditional companies that sell cruises on the basis of their brand name are familiar with this phenomenon. Carnival acquired Cunard for exactly that reason. Carnival bought “brand equity and a market niche, not ships … Cunard sources half of its passengers outside the United States and dominates the transatlantic market with the QE2. There is no competition with any of the other companies in the Carnival Family. Plus, with Cunard, Carnival gains a leadership position in the luxury market” (Klein, 2005: 35). If the brand loyalty of cruisers is high, this entry barrier is difficult to overcome by new entrants to the U.S. cruise industry. People that are attached to a particular product or company can only be enticed away with heavy advertisement spending and a new differentiated product. (Thompson, Strickland, and Gamble, 2005) The capital required to overcome this source could also be categorized to be part of the determinant ‘capital requirements’.
thereby decreasing the effect of the threat of new entrants on the level of competition in the U.S. cruise industry.
Capital requirements When setting up a new business the entrepreneur has to be aware of the start-up costs. These may either be sunk or regained. The costs for market research, rent, machines, factories, marketing, inventory and staff are just some of the total amount. The entrepreneur either has to have a large investors’ group or it credit trustworthiness must be high. (Porter, 2008)
New entrants should not underestimate the initial starting cost and the following expenses. A new ship has to be built or an older one has to be acquired and probably refurnished or stretched. Labor costs on board and ashore as well as regular supplier, port fee expenses as well as fuel costs and corporate and income tax are some of the major factors that are playing a role. For a short indication the costs of cruise ships built in 2007 or 2008 have been listed in table 17. This list has been compiled of a selection of the ten major companies in the world.
Table 17: Original costs U.S. cruise ships
Company Ship Original Costs
Carnival Carnival Freedom $500 million Carnival Carnival Splendor $500 million Cunard Queen Victoria $390 million MSC Cruises MSC Orchestra $360 million NCL America Norwegian Gem $390 million Princess Cruises Emerald Princess $500 million Princess Cruises Royal Princess $150 million
RCCL Liberty of the Seas
$590 million Source: Ward (2008)
It is obvious that the costs of ships depend on the size and the degree of luxury. While the Liberty of the Seas can host 4,370 passengers at full capacity, the Royal Princess can only take 838 people on board if maximally loaded.
to finance inventories and customer credit, and having sufficient cash reserve to cover start-up losses” (2005: 57). When the costs for manufacturing facilities and equipment are exchanged for the costs for a cruise ship, this list covers the expenses if a new company is set up. It can therefore be stated that the capital requirement needed to enter the U.S. cruise industry discourage new entrants.
This determinant is rated ‘-’ because the large amount of money needed inhibits new entrants and thereby influences the strength of the force negatively.
Access to distribution channels When entering an existing industry distribution channels normally already exist. Unless the new entrant desires to invent a new channel “the new firm must persuade the channels to accept its product through price breaks, cooperative advertising allowances, and the like, which reduce profits” (Porter, 1980: 10). The initial decrease in profits has to be accepted in order to diminish this entry barrier.
“The cruise industry, which has long said that travel agents are its friends, has done much to keep them as supporters. The importance of travel agents is clear. Direct bookings with cruise lines by passengers via the Internet or the telephone constitute between five and just over 15 percent of all reservations. Travel agents account for the rest. Commission rates between 12 and 18 percent, higher than any other travel product, have helped to keep travel agents onside with cruise lines. Promotions for travel agents further reinforce goodwill” (Klein, 2005: 13).
Whereas it is easy to access the distribution channels, it is more problematic to persuade the travel agents to promote the cruises of the new entrant. Commissions as well as cruises on board of the ship to be able to provide inside information to the customers are just two of the expenses that have to be paid when trying to convince the travel agents to sell the cruises. (Thompson, Strickland, and Gamble, 2005) Internet appearances and a booking hotline can be arranged by the new entrant himself, but the linkage to other home pages or travel agencies can only be established by networking and investing. Klein (2005) already mentioned that the travel agencies must be on your side as they arrange most of the bookings.
On the one hand, the easy access to the travel agents and the possibility to set up an own booking website and hotline lead to the conclusion that this determinant should be rated ‘+’. However, on the other hand, as the travel agencies are the most important distribution channel and require several concessions, it should be rated ‘-’. Although the determinant is rated ‘N’ in the end, the rating is slightly shifting to the negative side. The dependence on the travel agencies outweighs the easy access to the distribution channels. It can therefore be stated, that the determinant ‘access to distribution channels’ has a neutral influence on the strength of the force, with a slight negative touch. This means that because of this determinant the threat of new entrants has a slightly weakening effect on the overall level of competition in the U.S. cruise industry.
Access to necessary inputs “Established firms may have locked up the most favorable sources and/ or tied up foreseeable needs early at prices reflecting a lower demand for them than currently exists” (Porter, 1980: 11). New entrants have to gain the trust of suppliers and maybe even have to convince them that doing business with the new player will be more profitable in the long run.
most important input, however, is probably money. If the new entrants have access to necessary inputs in the U.S. cruise industry, the threat of new entrants increases because the new entrants can deal with this entry barrier. Concerning the fact that staff, suppliers, and port licenses can be obtained without major problems, this determinant is rated ‘+’. As new entrants are able to master this barrier, this determinant will not withhold new entrants from entering the industry. ‘Access to necessary inputs’ strengthens the power of this force.
Government policy “Government can limit or even foreclose entry into industries with such controls as licensing requirements and limits on access to raw materials” (Porter, 1980: 13). Quality standards, environment and pollution regulations as well as product safety requirements are just a few of the examples that might inhibit a new entrant from entering the industry. (Porter, 1980; 2008) “For example, pollution control requirements can increase the capital needed for entry and the required technological sophistication and even the optimal scale of facilities” (Porter, 1980: 13).
Several different national governments have to be taken into consideration when analyzing this determinant. First, the government of the country the cruise ship is sailing under is part of the analysis. However, the open registries of the above mentioned countries have been chosen for flags of convenience because the national government imposes no restrictions, laws or regulations on the ships. (Garin, 2005)
Second, the country the cruise company is headquartered in is of importance. Safety standards, pollution and environmental regulations as well as health standards are all required by U.S. American law. Obeying these laws is not only in the interest of the passengers but also of the U.S. cruise companies as they are not willing to jeopardize their reputation. (Klein, 2005) One example is that additional cleaning facilities have been provided when entering the ship after a sightseeing tour in Spain ashore during the time of the H1N1 pandemic in 2009. Moreover, regular evacuation exercises are organized with the crew and the passengers.
