Priceline case study

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This chapter focuses on identifying and evaluating a firm’s strengths and weaknesses in the functional areas

of business, including management, marketing, finance and accounting, production and operations,

research and development (R&D), and management information systems (MIS). Relationships among

these areas of business are examined. Strategic implications of important functional area concepts are

examined. The process of performing an internal audit is described. The resource-based view (RBV) of

strategic management is introduced as is the value chain analysis (VCA) concept. Priceline.com does an

excellent job using its strengths to capitalize on external opportunities. Priceline is showcased in the

opening chapter boxed insert.

The Nature of an Internal Audit

All organizations have strengths and weaknesses in the functional areas of business. No enterprise is

equally strong or weak in all areas. Maytag, for example, is known for excellent production and product

design, whereas Procter & Gamble is known for superb marketing. Internal strengths and weaknesses,

coupled with external opportunities and threats and clear vision and mission statements, provide the basis

for establishing objectives and strategies. Objectives and strategies are established with the intention of

capitalizing on internal strengths and overcoming weaknesses. The internal-audit part of the strategic-

management process is illustrated in Figure 4-1 with white shading.

Priceline.com, Inc.: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED

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Do you prefer Priceline or Expedia to find low travel prices? Headquartered in Norwalk, Connecticut,

Priceline.com Inc. is the leading online travel company where buyers “name their own price” for airline

tickets, hotel rooms, rental cars, cruises, and vacation packages. Founded in 1997 with a patented business

model, Priceline.com operates through the Booking.com, Priceline.com, TravelJigsaw, and Agoda

brand names. Priceline.com uses excellent strategic management to dominate the online travel business.

For example, the company generates annual sales of more than $4 billion and has an EPS of more than

$30. Priceline’s common stock (PCLN) had the best five-year (2007–2011) performance of all companies

in the S&P 500: a total return of 972 percent. Many analysts have a $750.00/share price target for

Priceline stock. In the last 12 months, PCLN’s return on assets was 23.08 percent, compared to its

competitors Expedia (EXPE)’s 4.19 percent and Orbitz World Wide (OWW)’s 2.60. PCLN’s return on

equity was 48.41 percent, much higher than EXPE’s 13.44 percent and Orbitz World Wide OWW’s negative

21.25. PCLN’s profit margin for the last 12 months was 25.58 percent, compared to EXPE’s 10.42 percent

and OWW’s negative 4.83.

With more than 5,000 employees, Priceline’s customers can choose set-price options. For airline tickets

and hotel reservations, Priceline.com generates sales on the margin, keeping the difference between the

price paid by the individual and what Priceline.com paid for the ticket or hotel room. Priceline’s recent

success has been especially driven by international travel, particularly to emerging market destinations.

About 65 percent of Priceline.com hotel room bookings are expected to be non-European going forward,

up from 42 percent the prior year.

Priceline provides price-disclosed hotel and rental car reservation services on a worldwide basis with

approximately 185,000 hotels and accommodations in 160 countries. The company’s rental car services

operate through its Name Your Own Price demand-collection system, as well as vacation packages

consisting of airfare, hotel, and rental car components; cruise trips; and destination services, including

parking, event tickets, ground transfers, and tours in the USA. Priceline provides an optional travel

insurance package that covers trip cancellation, trip interruption, medical expenses, and emergency

evacuation, as well as for loss of baggage, property, and travel documents for air, hotel, and vacation

package customers; and collision damage waiver insurance for rental car customers in the USA.

Priceline’s major competitor, Expedia, was founded in 1996, a year before Priceline. Priceline has four

times the volume of revenues of Expedia, but the two firms aggressively compete every day for customers

worldwide.

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FIGURE 4-1 A Comprehensive Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40.

Key Internal Forces

It is not possible in a strategic-management text to review in depth all the material presented in courses

such as marketing, finance, accounting, management, management information systems, and production

and operations; there are many subareas within these functions, such as customer service, warranties,

advertising, packaging, and pricing under marketing. But strategic planning must include a detailed

assessment of how the firm is doing in all internal areas.

For different types of organizations, such as hospitals, universities, and government agencies, the

functional business areas, of course, differ. In a hospital, for example, functional areas may include

cardiology, hematology, nursing, maintenance, physician support, and receivables. Functional areas of a

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university can include athletic programs, placement services, housing, fund-raising, academic research,

counseling, and intramural programs. Within large organizations, each division has certain strengths and

weaknesses.

A firm’s strengths that cannot be easily matched or imitated by competitors are called distinctive

competencies. Building competitive advantages involves taking advantage of distinctive competencies.

Strategies are designed in part to improve on a firm’s weaknesses, turning them into strengths—and maybe

even into distinctive competencies.

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FIGURE 4-2 The Process of Gaining Competitive Advantage in a Firm

Figure 4-2 illustrates that all firms should continually strive to improve on their weaknesses, turning them

into strengths, and ultimately developing distinctive competencies that can provide the firm with

competitive advantages over rival firms.

The Process of Performing an Internal Audit

The process of performing an internal audit closely parallels the process of performing an external audit.

Representative managers and employees from throughout the firm need to be involved in determining a