Expedia, Inc. and the Online Travel Industry
BUS 596
Professor Yvonne S. Smith
May 28, 2008
University of La Verne
Table of Contents
Expedia, Inc. Overview ………………………………………………………………Page 3
Strategic Posture
Strategic History of the Organization………………………………………Page 3
Mission Statement and Strategic Vision of Expedia, Inc.………………………Page 4
Current Business Level Strategy………………………………………………Page 5
Environmental Analysis
Five-Forces Analysis of Online Travel Industry………………………………Page 5
Driving Forces of Online Travel Industry………………………………………Page 11
Internal Analysis
Functional Analysis………………………………………………………………Page 16
Financial Analysis
Liquidity Ratios
Current Ratio………………………………………………………………………Page 20
Quick Ratio………………………………………………………………………Page 21
Asset Management Ratios
The Days Sales Outstanding (DSO) Ratio………………………………………Page 22
Total Asset Turnover………………………………………………………………Page 23
Debt Management Ratios
Debt to Assets Ratio………………………………………………………………Page 24
Debt to Equity Ratio………………………………………………………………Page 24
Profitability Ratios
Return on Total Assets (ROA)…………………………………………….. Page 25
Return on Common Equity (ROE)…………………………………………….. Page 26
Net Profit Margin………………………………………………………………Page 26
Market Value Ratios
Price/Earnings (P/E) Ratio………………………………………………………Page 27
Price/Cash Flow Ratio………………………………………………………Page 28
Organizational Structure and Culture………………………………………………Page 29
Core Competencies………………………………………………………………………Page 31
Distinctive Competencies………………………………………………………………Page 32
SWOT Analysis and TOWS Matrix
Strengths………………………………………………………………………Page 33
Weaknesses………………………………………………………………………Page 35
Opportunities………………………………………………………………………Page 36
Threats……….………………………………………………………………Page 36
TOWS Matrix………………………………………………………………Page 37
Strategic Direction
KSI #1 and Alternatives………………………………………………………Page 39
KSI #2 and Alternatives………………………………………………………Page 40
KSI #3 and Alternatives………………………………………………………Page 42 Action Plan for Year 1: 2009………………………………………………………Page 43
References…………………………………………………………….………………..Page 46
Expedia, Inc. Overview
According to Hoovers, Expedia is the current market leader in online travel services compared to its rivals Priceline, Orbitz, and Travelocity (Hoovers, 2008). This online travel service allows its customers to book online airplane tickets, hotel reservations, cruises, car rentals, and customized vacation packages. In addition, Expedia offers news, maps, and other travel associated content with its portfolio of brands including Hotels.com, Hotwire, TripAdvisor, eLong, and Classic Vacations.
As Expedia grew, the company decided to expand itself using a growth strategy that focused on international expansion. This was evident in 2006, when Expedia launched its new website for one of the worlds’ major traveling markets, Japan. Altogether, Expedia’s international brands include: eLong, Expedia Australia, Expedia Canada, Expedia France, Expedia Germany Expedia Italy, Expedia Japan, Expedia Netherlands, Expedia United Kingdom, and Hotels.com for global sites while Expedia’s domestic brands include Classic Vacations, Expedia.com, Expedia Corporate Travel, Hotels.com, Hotwire.com, and TripAdvisor (Expedia, Inc., 2008). Expedia, Inc. also operates in more than 50 global points of sale with destination sites in South and North America, Latin America, Europe, the Middle East, Africa, and Asia Pacific (Expedia, Inc., 2008). Interestingly, Expedia generates its money by charging transaction fees, or by purchasing travel inventory directly from the travel provider at discounted prices then charging customer’s premiums in addition to the original fee (Wikinvest, 2008).
Strategic Posture
Strategic History of the Organization
Expedia was founded in 1995, when the Microsoft Corporation decided to launch a new online travel service, but did not make its introduction to the Internet until 1996 (Expedia, Inc. 2008). In 1996, Expedia was still connected to the Microsoft Network, MSN (Expedia, Inc., 2006). Microsoft took initiative and provided financially for the start-up of this new company. In 1998, Expedia started to operate within the United Kingdom as well as investing heavily in technology to offer advanced search capabilities and other services to its customers. In 1999, Microsoft decided to spin of Expedia into its own publicly traded company, but kept a majority of Expedia’s shares for itself. In 2001, USA Networks, Inc. decided to acquire Expedia from the Microsoft Corporation and spent approximately $1.5 billion for its possession. In 2002, USA Networks, Inc. changed its brand name to USA Interactive, Inc. Then in 2003, USA Interactive, Inc. renamed itself as USA Interactive and then acquired the remaining shares of Expedia for approximately $3.3 billion (Expedia, Inc., 2006). During this time, the company began to grow its domestic and international travel portfolios with various companies. Additionally, Expedia prides itself in serving its customers with the best services and resources possible regarding travel for business or pleasure and continues to strive for this mission. Currently, Barry Diller serves as chairman and senior executive of Expedia, Inc., while Dara Khosrowshahi serves as CEO and president (Expedia, Inc., 2008). Both individuals continue to make efforts to make the best out of online travel experience for their Expedia customers (Expedia, Inc., 2008).
Mission Statement
The following is the mission statement for Expedia, Inc.:
“To get the world going by building the world’s largest and most intelligent travel marketplace” (Expedia, Inc., 2008).
Strategic Vision
The following is the strategic vision for Expedia, Inc.: “Expedia, Inc. is looking toward its next decade by continuing to innovate how travelers plan, purchase and share their travel experiences. We’re continuing to enhance our sites and travel booking tools and features while building our brands and travel offerings globally” (Expedia, Inc., 2008).
Current Business Level Strategy
Expedia plans to continue to meet the demands of its consumers and the current and future trends of society. The company plans to continue to be innovative with its technology and services it provides to travelers worldwide. Lastly, the company plans to gain a competitive edge over its competitors by understanding how travelers plan as well as buy and arrange travel tickets and packages. Expedia hopes to keep improving its websites and travel booking tools making these even more accessible to consumers while also improving brand image and travel contributions worldwide (Expedia, Inc., 2008).
Environmental Analysis
Five-Forces Analysis of Online Travel Agencies
According to Thompson, Strickland, & Gamble, 2008, there are five critical competitive forces that operate and vary from industry to industry within the overall market. These five competitive forces that industry members face include: (1) rivalry among competing sellers, (2) buyers, (3) potential new entrants, (4) suppliers of raw materials, parts, components, or other resource inputs, and (5) firms in other industries offering substitute products. The following chart is a model for substitutes, rivalries, buyers, new entrants, and suppliers in the online travel industry.
Five-Forces Model for Online Travel Agencies
Substitute Products Direct Sellers Metasearch engines Suppliers Rivalry Buyers
Hotel suppliers Orbitz Worldwide, Inc. Leisure travelers
Airline suppliers Priceline.com Corporate travelers
Car rentals Travelocity.com Inc. Travel agents
Destination services Expedia.com Travel Agencies Cruise lines New Entrants Direct Sellers Metasearch engines Call and book travel agents Call centers The following charts will analyze all five competitive forces and the level of strength each force endures regarding the online travel industry. High, medium, and low levels were assigned to each category based on subjective views by the group after researching and analyzing information available on Expedia, Inc. and examining the theories provided by Thompson et al.
Rivalry among Competing Sellers Force
Rivalry intensifies when competing sellers are active in launching fresh actions to boost their market standing and business performance High
Rivalry intensifies as the number of competitors increases and as competitors become more equal in size and capability. High
Rivalry is usually stronger in slow-growing markets and weaker in fast-growing markets. Med
Rivalry is usually weaker in industries comprised of so many rivals that the impact of any one company’s actions is spread thin across all industry members; likewise, it is often weak when there are fewer than five competitors. Med
Rivalry increases when buyer demand falls off and sellers find themselves with excess capacity and/or inventory. Low
Rivalry increases as it becomes less costly for buyers to switch brands. High
Rivalry increases as the products of rival sellers become more standardized and diminishes as the products of industry rivals become more strongly differentiated. High
Rivalry is more intense when industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volume. High
Rivalry increases when one or more competitors become dissatisfied with their market position and launch moves to bolster their standing at the expense of rivals. Med
Rivalry becomes more volatile and unpredictable as the diversity of competitors increases in terms of visions, strategic intents, objectives, strategies, resources, and countries of origin. Med
Rivalry increases when strong companies outside the industry acquire weak firms in the industry and launch aggressive, well-funded moves to transform their newly acquired competitors into major market contenders. Low
A powerful, successful competitive strategy employed by one company greatly intensifies the competitive pressures on its rivals to develop effective strategic responses or be relegated to also-ran status. Low
There are approximately four prominent competing online travel agency firms known as Orbitz Worldwide, Inc., Priceline.com Inc., Travelocity.com, and Expedia.com Inc. (Yahoo! Finance, 2008). Each firm in the industry attempts to increase their market presences using business models to catch the eyes of consumers, such as pricing, packaging, guarantees, and extra services (Rogow, 2007). For example, active launching of fresh products is high as competitors strive to differentiate their products and brands from those of rivals in order to remain independent (Rogow, 2007). An example of product differentiation in the online travel industry is making the online process more efficient with mobile devices, such as PDAs and Blackberrys for on-the-go travelers (Rogow, 2007). Other firms may also include weather forecasts to intended destinations for their customers traveling agendas (Rogow, 2007). Furthermore, as the market for online travel continues to grow, acquisitions between certain firms in the industry continue to make certain firms even larger in the competitive arena attempting to gain more market share (Rogow, 2007). Overall, since the business model strategies being used by these competing online travel agencies are relatively easy to duplicate, competition within the industry is strong.
Potential New Entrants Force
The presence of sizable economies of scale in production or other areas of operation. High
Cost and resource disadvantages not related to scale of operation. Low
Strong brand preferences and high degrees of customer loyalty. Low
High capital requirements. Med
The difficulties of building a network of distributors or retailers and securing adequate space on retailers’ shelves. Med
Restrictive regulatory policies. Low
Tariffs and international trade restrictions. Low
The ability and inclination of industry incumbents to launch vigorous initiatives to block a newcomer’s successful entry. High
Potential new entrants that try to compete in the online travel industry must compete with large size firms that have acquired additional sources to compete (Rogow, 2007). Therefore, new entrants into the market would be direct sellers, metasearch engines, call and travel book agents, and call centers. We currently live in an era that is technology based. Many customers conduct their research online from multiple sources. New entrants could include physical call centers for those who prefer to talk to an actual person instead of doing the research themselves, or have fears of potential threats from the Internet, such as credit card fraud or identity theft (Rogow, 2007).
New entrants will have to enter paying higher costs to compete in this industry, or accept cost disadvantage and lower profitability. Customer loyalty does not seem to be a factor in the online travel industry since customers seem to be price sensitive and will search for the best price available (Rogow, 2007). This does make it easier for incumbent companies to enter the industry. Lastly, the online travel agent industry uses a global distribution system (GDS) to check real-time flight schedules, pricing, and other factors when traveling. Many of the four main competitors have already acquired current GDS companies, or have made strategic alliances with several GDS companies making it even more difficult for new entrants to succeed (Rogow, 2007).
Firms in Other Industries Offering Substitute Products Force
Whether substitutes are readily available and attractively priced. High
Whether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes. High
Whether the costs that buyers incur in switching to the substitutes are high or low. High
Substitutes for online travel agent firms include direct sellers and metasearch engines. Direct sellers include the actual airlines, hotels, car rental facilities, etc. Customers have the opportunity to call, or visit the webpage of the actual location for an intended destination, or can use an online travel agent to find the lowest fares possible for them. Customers also have the choice to use metasearch engines that use multiple databases and other search engines to generate a list of choices that is easier than going to each search engine individually and trying to understand the results. In addition, online travel agencies try to lure customers away from booking trips with actual hotels, car rentals, and airlines by offering certain guarantees or packages if purchased from an online travel agency instead of the company itself (Rogow, 2007).
Buyers Force
If buyers’ costs of switching to competing brands or substitutes are relatively low. High
If the number of buyers is small or if a customer is particularly important to a seller. Low
If buyer demand is weak and sellers are scrambling to secure additional sales of their products. Low
If buyers are well informed about sellers’ products, prices, and costs. High
If buyers pose a credible threat of integrating backward into the business of sellers. Low
If buyers have discretion in whether and when they purchase the product. High
Currently, there are two types of buyers for online travel purchases: primary and secondary. Primary buyers consist of actual travel agent firms that use GDS to pull information from various hotels, car rentals, and airlines and make the information available to customers. Secondary buyers consist of corporate and leisure travelers. Pull factors are evident with the abundant amount of information and services available to customers regarding different carriers and low price fares (New Media Age, 2007). In addition, certain push factors that are present with online travel agencies are insufficient information about other competing firms unless otherwise researched by the consumer and price sensitivity (New Media Age, 2007). Overall, online travel agencies use GDS to find open reservations that are then transferred to the use of consumers for both leisure and corporate travel.
Suppliers of raw materials, parts, components, or other resource inputs Force
Whether the item being supplied is a commodity that is readily available from many suppliers at the going market price. High
Whether a few large suppliers are the primary sources of a particular item. Low
Whether it is difficult or costly for industry members to switch their purchases from one supplier to another or to switch to attractive substitute inputs. Med
Whether certain suppliers provide a differentiated input that enhances the performance or quality of the industry’s product. Med
Whether certain suppliers provide equipment or services that deliver valuable cost-saving efficiencies to industry members in operating their production processes. Med
Whether suppliers provide an item that accounts for a sizable fraction of the costs of the industry’s product. Low
Whether industry members are major customers of suppliers. High
Whether it makes good economic sense for industry members to integrate backward and self-manufacture items they have been buying from suppliers. High
There are approximately six types of suppliers the online travel industry utilizes including: hotel, airline, car rental, destination services, travel agencies, and cruise lines. For example, when a hotel has a vacancy, it will show up on the GDS, which will then become available to the online travel agents with consumers following soon after. Upon using a specific online agency, results will be generated for consumers regarding location, date, price, time, etc. Overall, there is no physical component supplied to online travel agents. Information is pulled through various technology systems and is redirected to customers looking for travel savings.
Driving Forces of the Online Travel Industry
The following analysis will now focus on five of the driving forces concerning the online travel industry.
Emerging New Internet Capabilities and Applications
With the driving force of emerging new Internet capabilities and applications, online reservation systems and hotel websites for the travel industry are on the rise. According to comScore, in January 2008, there were more than $824.4 million Internet users worldwide (European Travel Commission, 2008). In addition, The European Travel Commission reported that “Internet users have increased by 265.6% from eight years ago” (2008, pg. 1). Because of this, the online travel industry will more than double its revenues in the next three years, “from $38 billion last year to more than $80 billion in 2007” (Internet World Stats, 2005). According to the World Youth & Student Educational Travel Confederation’s global study of young independent travelers, young travelers who book online have increased from 10% to 50% in the past five years. And 80% of these travelers use the Internet to search for information before departing on their trip (European Travel Commission, 2008). The independent and youth travelers have basically grown up online from an early age and automatically turn to the Internet for travel information, advice, and reviews. Many websites and search engines are becoming increasingly informative for travelers who would like information on their preferred destination before booking a reservation. Online reviews have been the most helpful to consumers as friends and family opinions are decreasing. According to the statistics given by the Internet Advertising Bureau, 88% of users rate information provided by search results higher than that of friends and family (European Travel Commission, 2008). Feedback from travelers is also preferred as an Internet transaction where companies email their previous customers and ask for customer feedback from their previous stay. JupiterResearch’s research has found that the most compelling means to solicit feedback from travelers is e-mail: 42% of online travelers who contributed content did so because they received an email inviting their feedback (European Travel Commission, 2008). With daily transactions of booking a reservation online, travel websites are becoming more aware of security issues with the use of credit cards and online identity theft. Internet travel companies are increasing their spending on technology to improve security, performance, and reservation system databases.
Increasing Globalization
With the driving force of increasing globalization, the online travel industry is targeting every country imaginable for reservations. Currently, online travel websites are particular to their area, such as only offering bookings in the United States, but an increase in overseas travel has created an additional source of profit. The growths in bookings made outside the United States have outpaced the growth in domestic bookings. This is mainly because more people are traveling and are “increasingly comfortable trusting their reservations to Web sites” (European Travel Commission, 2008). Several Internet travel systems have noticed an increased in international travel to the United States by 11.8% in 2004 (Travel Industry Association, 2008). This is largely in part to the use of the Internet and how information on destinations help foreign travelers decide on where and when to book their trip. For example, from Nielsen ratings on Internet usage: 38.7% of the population in Asia use the Internet, 26.4% of the population in Europe use the Internet, and falling closely behind is North America’s 18% of the population that use the Internet (Internet World Stats, 2008). Online travel companies are increasingly competing to gain the trust and respect of foreign travelers to visit the United States and to book their reservations on their website. Companies are also adding more resources and information on their websites for customers to allow them to have the opportunity to book an international vacation.
Changes in an Industry’s Long-term Growth Rate
With the driving force of changes in industry’s long-term growth rate, many Internet company travel websites are increasing and retail travel agencies are decreasing. Travel agents are no longer the main representatives that customers will pay attention to. As consumers get comfortable with the Internet, and the reservation systems get easier, the content will “quickly force the $1.3 trillion dollar business to adjust how it markets” (Rubel, 2007). Travel agents have been the “key intermediary between travel suppliers and consumers,” with detailed information on particular destinations as their main competitive edge over others in the industry (Cheyne, 2006). Travel agents who have retail spaces are being forced to close down their stores as hotels, airlines, and other travel partners are increasingly using the Internet as their form of booking agent. Companies once relied on travel agents to sell their destinations, but because their online websites offer much more for their customers, they no longer need these travel agents to help them sell their services. Because of this, travel agents could become more competitive “through more effective use of information technology and that the perceived value of the services required can influence consumer choices” (Cheyne, 2006, pg. 1).
Changes in Cost and Efficiency
With the driving force of the changes in cost and efficiency, consumers booking their trips online are searching for the most inexpensive way to travel. Bargain hunting between travel companies is rapidly growing as a customer will not only search on one website, but will search through many to get the best price for their intended destination. Travelers are continuously looking for better deals or packages that will increase their value of their intended trip. Companies are competing for bookings and reservations and will add amenities to the package or credit towards the hotel’s restaurant or room charge in order to gain business and compete with others in the industry. More and more travelers are also booking online and are willing to pay an extra few dollars to guarantee their reservation or to have that special added amenity given from the company or hotel. With the amount spent on a vacation booked online, “51% of luxury travelers are willing to book a $2,000 to $5,000 vacation package online; and another 29% are comfortable booking a $5,000 or more vacation package” (European Travel Commission, 2008). The standard traveler of 24% would be willing to spend $2,000 to $5,000 for a vacation booked online, and almost 50% of travelers are comfortable spending up to $1,000 and $2,000 (European Travel Commission, 2008).
Growing Buyer Preferences for Differentiated Products Instead of a Commodity Product
With the driving force of growing buyer preferences for differentiated products instead of a commodity product, online travel companies are competing for differentiation with many added benefits being offered to the customer. Internet booking reservation systems have specific areas in which customers can make a particular need or request prior to their stay. Online travel companies are increasing the amount of hotel photos and videos on their websites to allow customers to feel connected to their interested destination. Online brochures have also increased as a way for travel agencies to promote a particular destination and to offer an increased amount of information on a specific region. A new travel focused social networking website has been launched to help travel companies promote their services to consumers through classified ads, videos, blogs, and profiles (European Travel Commission, 2008). Because customers are not as brand loyal as they once used to be, companies are having a harder time attracting previous buyers for repeat business. With the help of social networking websites, travel companies can advertise to the increased amount of Internet users worldwide and hopefully gain new and repeat business on a continuous basis.
Industry Outlook
Currently, the online travel industry is continuing to grow and is projected to represent 34% of all travel spending by the year 2010 (Jupitermedia, 2005). This projection is due to the lower distribution costs of online travel agencies and higher total travel spending for air, cruise, and hotel sectors (Jupitermedia, 2005). One important factor that must be taken into consideration is rising fuel costs for travel that are requiring firms to raise their costs and prices (Jupitermedia, 2005). This will certainly affect how well online travel agencies will be able to continue to offer reasonable prices to consumers while staying competitive in the market (Jupitermedia, 2005). Lastly, another important factor that will determine the future of online travel agencies is the continued growth of business travel (Jupitermedia, 2005). It is projected that the business travel market will account for $31.5 billion by the year 2010, which was estimated to be around $15.1 billion during 2005 (Jupitermedia, 2005).
Internal Analysis
Functional Analysis
To analyze the functional value chain of Expedia, Inc., the major functions include R&D, Marketing, Service, and Information Technology and Operation. The functional analysis uses four criteria to evaluate the performance of each function. The measures of criteria are efficiency, quality, innovation and customer response. The following table is the result of the functional analysis with a rating scale of High, Medium, and Low.
Table: Functional Analysis
R&D Marketing IT & Operation Service
Efficiency High High High High
Quality High High High High
Innovation Med. Med High Med
Customer Response N/A High N/A High
R&D
Expedia, Inc. is an online traveling company that provides traveling information and reservation tools to its customers. Therefore, the first priority of R&D function within Expedia, Inc. is seeking the variety of traveling products and services and obtaining a wide range of travel brands.
Overall, the performances of R&D within Expedia, Inc. are high because Expedia, Inc. strives to obtain maximum customers, partners and suppliers through frame wide-ranging brands collection. In order to be the leading brand in this industry, Expedia, Inc. believes relying on widespread brands collection would get maximum value and market shares. Therefore, Expedia, Inc. mentions that “Expedia, Inc. believes its flagship Expedia brand appeals to the broadest range of travelers, with its extensive product offering ranging from single item bookings of discounted product to complex bundling of higher-end travel packages” (Expedia, Inc., Annual Report, 2007, pg. 5).
In order to enhance its suppliers, Expedia, Inc. uses the extent brands collection and international points of sales. This can help Expedia, Inc. offer a variety of products and services. According to the annual report of Expedia, Inc., Expedia will keep investing in R&D to maintain the best brand portfolio and create maximum value to its suppliers, partners and customers (Expedia, Inc., Annual Report, 2007, pg. 5).
Marketing
The marketing strategy of Expedia, Inc. is to construct an effective, profitable channel by raising awareness of the consumers who are sensitive to price and to enhance the benefit of its subsidiary companies and itself. Furthermore, the media strategy of Expedia, Inc. includes TV commercials, print media, direct-mail, and Internet such as portal we
