Porters Forces Cruise Industry Essay

Porter’s Six Forces I. Threat of New Entrants: Low * Barriers to entry: High * High Capital Requirements: The capital required to start up a cruise line is one of the key factors contributing to this industry’s high barriers to entry. With the average cost of building a cruise ship rising, the amount of capital needed to start up a cruise line is estimated at one billion dollars. Therefore discouraging any new entrants into the industry. * High Brand Equity: A cruise line’s brand awareness and reputation are significant factors to the industry’s high barriers to entry. Cruising is a risk-averse activity, which influences consumers to trust and purchase from established cruise lines. That being said it would be difficult for any new entrants with low brand equity to successfully compete with this oligopolistic industry. (Dowling, 2010) * High Economies of Scale: The cruise line industry has a major cost advantage over any new rival based on two types of economies of scale. These cost savings contribute positively to the liners profitability. * Economies of Destiny: These â€Å"mega-ships† are built with a large number of cabins and lower berths aiding in the spread of substantial fixed costs over many passengers. Therefore, resulting in lower unit costs and making the product much more appealing and affordable to more parts of the population by achieving a break-even point at lower prices. Cruise liners also have a strong incentive to reach high utilization ratios in order to achieve such economics, which result to such discounting. (Dowling, 2010) * Economies of Fleet Size: This is where fixed costs that require a substantial financial capital such as research, design, construction, training, sales, administration, marketing and advertising are spread over a large number of ships. (Dowling, 2010) II. Rivalry Among Existing Firms: High * High Concentration Ratio: The cruise line market is characterized by high concentration, as there are a few but strong market players that make up 90% of market share. The two leading players, Carnival and Royal  Caribbean, account for 75% of the market with each owning a portfolio of lines catering to a specific market. A high concentration ratio allows existing firms to work together in the market and reduces the likelihood of intense price competition between the leading players. This allows them to achieve mass-market penetration. (Cruise Watch) * High rate of industry growth: The cruise industry has had a steady growth over the last five years with a 7.8% increase. The growth increase and high concentration intensify the competition among the leading players to seek ways of gaining a competitive advantage. â€Å"New ships, global destinations, itineraries, and innovative shipboard facilities have driven constant growth in cruise passengers. â€Å" (CLIA) * High competitor diversity: Cruising is characterized by high heterogeneity and this offers the chance for diversification both vertically (quality) and horizontally (variety). (Dowling, 2010) Because of this there is an intensive and ongoing commitment to provide a superior product by offering distinct services, activities, and appealing itineraries that reflect the interests of today’s traveler. Therefore, although the market is oligopolistic which keep competitive pricing low, competitors must make there cruise the most appealing to gain a competitive advantage. * High exit barriers: Cruise companies have high exit barriers due to the difficulty the company may have selling their assets. Cruise lines require large capital requirements that strap the company from leaving the industry and face difficulty when trying to find any potential buyers. III. Threat of substitutes: Medium * Types of available substitutes: In the leisure-industry substitutes includes resorts, theme parks, traveling by air or land, and various other vacation destinations. Research shows that in 2011 only 3% of Americans have vacationed on a cruise, leaving a vast percentage of the population choosing alternative vacations. * Distinctiveness of cruise experience: Cruising is perceived as a more expensive vacation alternative compared to land-based trips, however there is a strong belief among consumers that cruising offers high value for the price consumers pay. Cruising is looked at a full package by offering bundles of travel packages including airfare, dining, itineraries, resort stay, and multiple other amenities. Therefore, a cruise  offers a distinctive type of experience that most consumers would choose over various other traveling substitutes. (UCLIA) IV. Bargaining power of buyers: Medium * Travel agencies: Travel agencies have strong relationships with the cruise industry as they book around two thirds of their cruise. Although this percentage is declining due to the growth of consumer knowledge and technology the percentage of cruisers using travel agents is relatively strong. (UCLIA) * Low price sensitivity: As cruising may be categorized as a luxurious leisure-activity, its target market on average have high annual income of $82,000 – $97,000 with the average age of a cruiser being in their late forty’s. Therefore, they are not as sensitive to pricing, as the price of a cruise vacation is relatively low to the average income of the target market. * Peak seasons: During peak seasons when demand exceeds capacity buyers have lower bargaining power as opposed to when ships offer last minute discounts in order to avoid any empty berths. Therefore making the bargaining power of the buyer medium as competition is relatively high during these seasons, and extreme discounts are offered when demand decreases. * Low threat of backward integration: The huge amounts of capital required to purchase a cruise ship along with the various amenities included make it extremely difficult for any consumers to provide themselves with the cruising experience. Therefore, lowering the bargaining power of the buyer. V. Bargaining power of suppliers: Medium * Fuel and Ships: The bargaining powers of fuel and ship suppliers are relatively high. An increase in the price of fuel not affect the fuel cost of the ship but will cause an increase in the ticket price in order to make up for increased cost. As there are a limited amount of ship building lots and ship builders cruise lines must accept the number given to them. If they do decide to switch builders switching costs are very high because the ship builder owns the design of the ship he builds and therefore the company must raise a large amount of capital in order to go back to the drawing board. * Food and other suppliers: However on the other end most all other suppliers in the hospitality leisure-industry have low buying power. This is because there are many different substitutes available and multiple  suppliers to choose from ranging from food, drink, and alcohol to many others. This makes the bargaining power of suppliers on the other end very low. VI. Relative power of the stakeholders/ Complimentors : High * Rapid Growth: The rapid growth in the cruise industry has resulted in spiked environmental stress and awareness. The cruising destinations offered are frequently those in threatened environments such as the Mediterranean and Caribbean. There are many ways cruise lines can team up with other stakeholders in order to reduce the environmental impact of this growing market. They can work together with local governments and communities to develop management plans for sustainable growth, create standards, and increase their passenger and crew awareness of environmental issues. Companies may also directly contribute to sustainability by investing in local community projects and organizing on-board fundraising. (Mittermeier) * Governments: â€Å"Governments are responsible for enacting policies that protect natural and cultural resources, and providing a supportive enabling environment, for example, by offering financial or business incentives to cruise lines and local businesses for responsible management and operational practices.† (Mittermeier) Therefore, companies must maintain a positive and trusting relationship between governments and other stakeholders in protecting the environment. This will ensure the passengers on board will enjoy a safe vacation and the destinations remain healthy and attractive to the passengers who will visit in the future. Work Cited: Cruise market watch . (n.d.). Retrieved from http://www.cruisemarketwatch.com/market-share/ CLIA. (n.d.). Profile of the u.s. cruise industry. Retrieved from http://cruising.org/pressroom-research/cruise-industry-source-book/profile-us-cruise-industry Cruise lines international association, inc.. (2012, February). Retrieved from http://www.cruising.org/sites/default/files/pressroom/2012CruiseIndustryUpdat eFinal.pdf Dowling, R. K. (2010). Cruise ship tourism. CABI. Mittermeier, R. (n.d.). Sustainable stewardship. Retrieved from http://www.worldcruiseindustryreview.com/feature_articles/WCR017/Sustainable.pdf Rodrigue, J., & Notteboom, T. (1998). The geography of transport systems. Routledge. Retrieved from http://people.hofstra.edu/geotrans/eng/ch7en/appl7en/ch7a4en.html Wheelen, T. L., & Hunger, J. D. (2012). Strategic management and business policy. (13 ed., pp. 159-161). New Jersey: Pearson.