Case study

Chicago-based Groupon was launched in 2008 by Andrew Mason with the idea to email subscribers daily deals of heavily discounted coupons for local restaurants, theatres, spas, etc. Via the emails or by visiting the Groupon website customers purchase these substantially discounted deals in the form of electronic coupons which can be redeemed at the local merchant. Groupon brings exposure and more customers to the merchants and charges them commissions for the same. The venture rapidly grew into a daily deal giant and became the fastest-growing internet business ever to reach a $1bn valuation milestone and, thus, became a 'unicorn' (name for start-ups with valuations over $1bn). In 2010 Groupon rejected a $6bn (€4.5bn) takeover bid by Google and instead went public at $10bn in 2011.

While Groupon's daily deals were valued by customers - the company quickly spread to over 40 countries - they also attracted thousands of copycats worldwide. Investors questioned Groupon's business and to what extent it had rare and inimitable resources and capabilities. CEO Andrew Mason denied in the Wall Street Journal (WSJ) that the model was too easy to replicate:

'There's proof. There are over 2000 direct clones of the Groupon business model. However, there's an equal amount of proof that the barriers to success are enormous. In spite of all those competitors, only a handful is remotely relevant.

This, however, did not calm investors and Groupon shares fell by 80 per cent at its all-time low in 2012. One rare asset Groupon had was its customer base of more than 50 million customers, which could possibly be difficult to imitate. The more customers, the better deals and this would make customers come to Groupon rather than the competitors and the cost for competitors to acquire customers would go up. Further defending Groupon's competitiveness, the CEO emphasised in WS) that it is not as simple as providing daily deals, but that a whole series of things have to work together, and competitors would have to replicate everything in its operational complexity":

'People overlook the operational complexity. We have 10,000 employees across 46 countries. We have thousands of salespeople talking to tens of thousands of merchants every single day. It's not an easy thing to build.

Mason also emphasised Groupon's advanced technology platform that allowed the company to 'provide better targeting to customers and give them deals that are more relevant to them'. Part of this platform, however, was built via acquisitions - a route competitors possibly also could take.

If imitation is the highest form of flattery Groupon has been highly complimented, but investors have not been flattered. Consequently, Andrew Mason was forced out in 2013, succeeded by the chairman Eric Lefkofsky. Even though Amazon and other copycats left the daily-deals business he struggled to explain how Groupon would fight off imitators. The company was forced to exit over 30 international markets. Lefkofsky later returned to his chairman role and was followed by Rich Williams in 2015. He managed to turn Groupon profitable for the first time ever in 2017, but still did not regain investors' confidence with the share price still below $4, far from the $20 IPO price. Williams, however, was optimistic:

'[Groupon) is one of the first unicorns. It got a lot of praise and attention it didn't deserve at the beginning. We've not recovered from that. Over time, the numbers will speak for themselves.'

NOTE " ANSWER IN SRTATEGIC MANAGEMENT WAY "

1. If you were the new Groupon CEO what resources and capabilities would you build on to give the company a sustainable competitive advantage?

Designing a Managerial Incentives Contract

Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in reduced personal entrepreneurship and increased stress-related health care costs or they can reduce effort, thereby avoiding the personal costs. The CEO and EVPs face three possible random outcomes: the probability of the company experiencing good luck is 30 percent, medium luck is 40 percent, and bad luck is 30 percent. Although the senior management team can distinguish the three “states” of luck as the quarter unfolds, the Compensation Committee of the Board of Directors (and the shareholders) cannot do so. Once the board designs an incentive contract, soon thereafter the good, medium, or bad luck occurs, and thereafter the senior managers decide to expend high or reduced work effort. One of the observable shareholder values listed below then results.

Assume the company has 10 million shares outstanding offered at a $65 initial share price, implying a $650,000,000 initial shareholder value. Since the EVPs and CEOs effort and the company’s luck are unobservable to the owners and company directors, it is not possible when the company’s share price falls to $50 and the company’s value to $500,000,000 to distinguish whether the company experienced reduced effort and medium luck or high effort and bad luck. Similarly, it is not possible to distinguish reduced effort and good luck from high effort and medium luck.

Answer the following questions from the perspective of a member of the Compensation Committee of the board of directors who is aligned with shareholders’ interests and is deciding on a performance-based pay plan (an “incentive contract”) for the CEO and EVPs.

Referenced Questions:

• 2. If you decide to pay 1 percent of the increase in shareholder value as a cash bonus, what performance level (what share price or shareholder value) in the table should trigger the bonus? Suppose you decide to elicit high effort by paying a bonus should the company’s value rise to $800,000,000. What two criticisms can you see of this incentive contract plan?
• 3. Suppose you decide to elicit high effort by paying a bonus only for an increase in the company’s value to $1,000,000,000. When, and if, good luck occurs, what two criticisms can you see of this incentive contract plan?
• 4. Suppose you decide to elicit high effort by paying the bonus when the company’s value falls to $500,000,000. When, and if, bad luck occurs, what two criticisms can you see of this incentive contract plan?

_______________________________________________________

#8) Design an incentive plan that seeks to elicit high effort by granting restricted stock. Show that one-half million shares granted at $70 improves shareholder value relative to all prior alternatives.

#9) Sketch the game tree for designing this optimal managerial incentive contract among the alternatives in Question 2, 3 and 4. Who makes the first choice? Who the second? What role does randomness play? Which bonus pay contract represents a best reply response in each endgame? Which bonus pay contract should the Compensation Committee of the Board select to maximize expected value? How does that compare with your selection based on the contingent claims analysis in Questions 7 and 8?

Consider the following simple signaling model of education. A worker is either high productivity or low productivity. The worker can be high productivity with probability 1/3 and low productivity with probability 2/3. The worker knows her productivity. The firm that she approaches for employment does not.

The firm must decide whether to offer the worker a High Skill Job or a Low Skill Job. The High Skill Job pays the worker 8 units (regardless of productivity), and the Low Skill Job pays the worker 5 units (regardless of productivity).The firm earns a payoff of 3 from hiring the worker into the Low Skill Job, regardless of the worker's productivity. If the firm hires the worker into a High Skill Job, the firm earns a payoff of 8 if the worker is high productivity, and zero if she is low productivity.

(a) In equilibrium, what job will the firm offer the worker? Explain your answer and show all work.

Next, suppose that before approaching the firm for a job, the worker decides whether or not to obtain a university education. Education costs a high productivity worker 2 units of utility, but costs a low productivity worker 5 units of utility. Upon observing whether the worker has acquired education (but without observing directly the productivity of the worker) the firm must decide whether to offer the worker a High Skill Job or a Low Skill Job.

(b) Is there an equilibrium in which high productivity workers get education but low productivity workers do not? Show all work and explain your answer.

(c) What type of market failure is illustrated in this question? Explain. Offer one other way that the firm and worker may be able to work around this market failure, and explain.

1. Dr. Woz and Dr. Yaz want to test whether violent video games have an effect on aggressive thinking. In order to test aggressive thinking, Woz and Yaz are going to use a test developed at GTA University; scores greater than 70 on the test indicate agreement with statements that endorse aggressive behavior. They select a sample of n = 100 teenagers from a local high school for the study. Each of the students spends an hour playing a first-person shooter video game and then takes the test. The mean and standard deviation for the sample is M = 73 and s = 20. Woz and Yaz would like to know if the sample mean of 73 is statistically significantly different from 70 using a two-tailed test with ? < .05 and critical values of t of ±1.98.

a. What is the null hypothesis for this test? H₀ =

b. What is the estimated standard error for this test?

c. Calculate the value of t (round to two decimal places, if rounding is necessary).

d. Do you accept or reject the null hypothesis?

2. A paired samples t-test produces the following results: t(99) = 2.15, p < .05. The study included 1 blank participants and the decision was to 2 blank the null hypothesis. (Note: Your first answer will be a number and your second will be a word.)

3. The estimated standard error:

Montoure Company uses a perpetual inventory system. It entered into the following calendar-year purchases and sales transactions

3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification. For specific identification, units sold consist of 600 units from beginning inventory, 300 from the February 10 purchase, 190 from the March 13 purchase, 140 from the August 21 purchase, and 315 from the September 5 purchase. (Round your average cost per unit to 2 decimal places.)

Problem 2-2A Preparing and posting journal entries; preparing a trial balance LO C3, C4, A1, P1, P2

Aracel Engineering completed the following transactions in the month of June.

1. Jenna Aracel, the owner, invested $200,000 cash, office equipment with a value of $5,400, and $60,000 of drafting equipment to launch the company.
2. The company purchased land worth $53,000 for an office by paying $9,200 cash and signing a long-term note payable for $43,800.
3. The company purchased a portable building with $58,000 cash and moved it onto the land acquired in b.
4. The company paid $4,700 cash for the premium on an 18-month insurance policy.
5. The company completed and delivered a set of plans for a client and collected $8,800 cash.
6. The company purchased $28,000 of additional drafting equipment by paying $11,400 cash and signing a long-term note payable for $16,600.
7. The company completed $17,500 of engineering services for a client. This amount is to be received in 30 days.
8. The company purchased $1,300 of additional office equipment on credit.
9. The company completed engineering services for $22,000 on credit.
10. The company received a bill for rent of equipment that was used on a recently completed job. The $1,475 rent cost must be paid within 30 days.
11. The company collected $6,000 cash in partial payment from the client described in transaction g.
12. The company paid $2,400 cash for wages to a drafting assistant.
13. The company paid $1,300 cash to settle the account payable created in transaction h.
14. The company paid $915 cash for minor maintenance of its drafting equipment.
15. Jenna Aracel withdrew $10,070 cash from the company for personal use.
16. The company paid $1,900 cash for wages to a drafting assistant.
17. The company paid $2,600 cash for advertisements on the Web during June.

Required:
1. Prepare general journal entries to record these transactions using the following titles: Cash (101); Accounts Receivable (106); Prepaid Insurance (108); Office Equipment (163); Drafting Equipment (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250); J. Aracel, Capital (301); J. Aracel, Withdrawals (302); Engineering Fees Earned (402); Wages Expense (601); Equipment Rental Expense (602); Advertising Expense (603); and Repairs Expense (604).
2. Post the journal entries from part 1 to the ledger accounts.
3. Prepare a trial balance as of the end of June.

Problem 2-2A Preparing and posting journal entries; preparing a trial balance LO C3, C4, A1, P1, P2

Aracel Engineering completed the following transactions in the month of June.

1. Jenna Aracel, the owner, invested $185,000 cash, office equipment with a value of $9,200, and $73,000 of drafting equipment to launch the company.
2. The company purchased land worth $51,000 for an office by paying $6,900 cash and signing a long-term note payable for $44,100.
3. The company purchased a portable building with $55,000 cash and moved it onto the land acquired in b.
4. The company paid $2,600 cash for the premium on an 18-month insurance policy.
5. The company completed and delivered a set of plans for a client and collected $9,600 cash.
6. The company purchased $29,000 of additional drafting equipment by paying $11,300 cash and signing a long-term note payable for $17,700.
7. The company completed $19,500 of engineering services for a client. This amount is to be received in 30 days.
8. The company purchased $1,050 of additional office equipment on credit.
9. The company completed engineering services for $29,000 on credit.
10. The company received a bill for rent of equipment that was used on a recently completed job. The $1,656 rent cost must be paid within 30 days.
11. The company collected $5,000 cash in partial payment from the client described in transaction g.
12. The company paid $2,000 cash for wages to a drafting assistant.
13. The company paid $1,050 cash to settle the account payable created in transaction h.
14. The company paid $1,190 cash for minor maintenance of its drafting equipment.
15. Jenna Aracel withdrew $10,140 cash from the company for personal use.
16. The company paid $1,300 cash for wages to a drafting assistant.
17. The company paid $2,900 cash for advertisements on the Web during June.

Required:
1. Prepare general journal entries to record these transactions using the following titles: Cash (101); Accounts Receivable (106); Prepaid Insurance (108); Office Equipment (163); Drafting Equipment (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250); J. Aracel, Capital (301); J. Aracel, Withdrawals (302); Engineering Fees Earned (402); Wages Expense (601); Equipment Rental Expense (602); Advertising Expense (603); and Repairs Expense (604).
2. Post the journal entries from part 1 to the ledger accounts.
3. Prepare a trial balance as of the end of June.

Problem 2-2A Preparing and posting journal entries; preparing a trial balance LO C3, C4, A1, P1, P2

Aracel Engineering completed the following transactions in the month of June.

1. Jenna Aracel, the owner, invested $200,000 cash, office equipment with a value of $5,400, and $60,000 of drafting equipment to launch the company.
2. The company purchased land worth $53,000 for an office by paying $9,200 cash and signing a long-term note payable for $43,800.
3. The company purchased a portable building with $58,000 cash and moved it onto the land acquired in b.
4. The company paid $4,700 cash for the premium on an 18-month insurance policy.
5. The company completed and delivered a set of plans for a client and collected $8,800 cash.
6. The company purchased $28,000 of additional drafting equipment by paying $11,400 cash and signing a long-term note payable for $16,600.
7. The company completed $17,500 of engineering services for a client. This amount is to be received in 30 days.
8. The company purchased $1,300 of additional office equipment on credit.
9. The company completed engineering services for $22,000 on credit.
10. The company received a bill for rent of equipment that was used on a recently completed job. The $1,475 rent cost must be paid within 30 days.
11. The company collected $6,000 cash in partial payment from the client described in transaction g.
12. The company paid $2,400 cash for wages to a drafting assistant.
13. The company paid $1,300 cash to settle the account payable created in transaction h.
14. The company paid $915 cash for minor maintenance of its drafting equipment.
15. Jenna Aracel withdrew $10,070 cash from the company for personal use.
16. The company paid $1,900 cash for wages to a drafting assistant.
17. The company paid $2,600 cash for advertisements on the Web during June.

Required:
1. Prepare general journal entries to record these transactions using the following titles: Cash (101); Accounts Receivable (106); Prepaid Insurance (108); Office Equipment (163); Drafting Equipment (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250); J. Aracel, Capital (301); J. Aracel, Withdrawals (302); Engineering Fees Earned (402); Wages Expense (601); Equipment Rental Expense (602); Advertising Expense (603); and Repairs Expense (604).
2. Post the journal entries from part 1 to the ledger accounts.
3. Prepare a trial balance as of the end of June.

in 1976, an outbreak of pulmonary infections among participants at an American Legion convention in Philadelphia led to the identification of a new disease, Legionnaire's disease. The bacterium responsible for the disease had never before been known to be pathogenic. From your knowledge of bacterial genetics, can you postulate how it might have acquired the ability to cause disease

The Clarke Co. acquired a machine on May 1, 2006, at a cost of $60,000. The machine is expected to have a ten-year life and a residual value of $5,000. The estimated lifetime output from the machine is expected to be 55,000 units. Under which of the following depreciation methods would the depreciation charge be the greatest in 2006, if 9,100 units were produced in that year?