Session 1
Track Chair: Janis L. Gogan, Bentley College
Session Chair – Julie Hertenstein, Northeastern University
CASES:
Thomas J. Vogel, Western New England College
Julie H. Hertenstein and Marjorie B. Platt, Northeastern University
Robert McDonald, University of New Haven
Robert McDonald, University of New Haven
Session 2
Track Chair and Session Chair: Janis L. Gogan, Bentley College
CASES:
BizE.com: On the Path to Profitability?
Kenneth E.
Chapman and Janis L. Gogan, Bentley College with Kathleen Fitzgerald
E-Business in Heineken USA: Reengineering
Distribution
Gyeung-Min
J. Kim and John Price, Portland State University
SkiShack 1997-1998
Malu
Roldan, San Jose State University
Cendant Corp.:
Examining the Compensation and Accounting Issues Involved in a Stock
Option Repricing Program*
Thomas J. Vogel, Western New
England College
Case
Objectives and Use
Cendant
Corp. will be infinitely remembered for the accounting irregularities that
became evident shortly after the company was formed by the merger of HFS, Inc.
and CUC International in December 1997.
However, the events in this case also provide an ideal setting to
examine the issues involved with executive compensation as related to stock
option plans. Because the accounting
scandal resulted in a significant decrease in Cendant's stock price, stock
options held by company executives and employees became out-of-the-money and
thus lacked the motivational
incentive they were designed to create.
This provided a special dilemma to the compensation committee of the
company - i.e. how to modify current executive compensation agreements to
restore their motivational incentive.
In
this case, accounting students are first required to evaluate a potential solution
to this dilemma - repricing existing options to a lower exercise price. Although this practice became popular in the
1990s, opposition to option repricings arose from critics who claimed that it
rewarded executives for poor performance.
However, a repricing program is often the only device available to a
company that wishes to prevent valuable employees from seeking employment with
competitors that offer in-the-money options as part of their compensation
package.
A
secondary use of the case is to examine the accounting treatment for repriced
options as modified by Interpretation #44, issued in March 2000 by the
Financial Accounting Standards Board.
The case provides all necessary information for students to examine the
impact on subsequent earnings if this interpretation had been in effect when
Cendant adopted its repricing program.
For companies that account for stock options in accordance with APB 25,
future stock option repricing programs will create significant fluctuation in
subsequent earnings. The case
demonstrates that earnings will increase (decrease) substantially in years when
the company's stock price decreases (increases).
Endius Inc.:
Alternatives for Developing a New Medical Device
Julie H. Hertenstein and
Marjorie B. Platt, Northeastern University[1]
This
case provides students an opportunity to conduct relevant cost business
decision analysis of two alternatives in the context of a start-up company for
which many cost factors are highly uncertain. It enables students to integrate
non-cost factors such as long-run product development strategy and employee
morale into their analysis. Students are introduced to the concept of
outsourcing new product development. In addition, students get a brief
introduction to the new product development process,
and to issues faced during new product development such as the importance of
time-to-market and planning to facilitate product manufacturing, thereby
illustrating the value of financial skills to new product development.
In
addition, the case introduces students to the field of medical products for
minimally invasive surgical techniques. The brief discussion of the advantages
and disadvantages of minimally invasive surgery and trends in the medical
products industry provide opportunities for students to learn about this large,
global industry.
This
case was developed for MBA and executive courses in managerial accounting. It
can also be used in graduate business courses in entrepreneurship and new
product development, and in product design or industrial design courses
addressing the management of new product development. It is well suited to programs and courses that take an
integrative, interfunctional perspective into traditional functional courses.
Endius Inc., a startup company
entering the medical products market, has developed a prototype for a promising
new surgical instrument for use in new types of surgery. Endius’s new
president, Tom Davison, was determined to get Endius out of the R&D phase and
into product commercialization and product launch. He pursued these two
objectives simultaneously. He sought funding for this startup through his
venture capital connections; he also evaluated alternatives for the development
of a commercially viable prototype of the steerable surgical forceps. The case
focuses on the latter issue.
In spring 1996, Davison is seriously considering two product development alternatives. First, he can develop the steerable forceps using an in-house staff. Second, he can partner with an outside product development consultancy that he has used previously. Davison articulates three criteria he considers important to this decision: 1) the time required to complete the product development, 2) the range of expertise available to Endius for product development, and 3) the cost of product development. The case provides students the opportunity to regard relevant cost and non-cost factors, including nonfinancial quantitative (e.g., time to market) and qualitative (e.g., range of expertise, development of product development as a core competence, employee morale) issues, that should be considered in this outsourcing decision.
Mirage Resorts
Robert McDonald, University
of New Haven*
Teaching Objectives
The case is intended for a course on financial statement analysis, in an MBA level or senior level undergraduate course. The student should learn to:
a)
Read
Management’s Discussion and Analysis to learn about an industry, and the
specific performance of a firm as outlined on the financial statements.
b)
Use
the Dupont formula in the analysis of the return on equity for a firm. The format breaks the return on equity into
four parts for further analysis: pre-tax margin, asset turnover, leverage
factor, and retention of net income after taxes.
c)
Use
the Dupont formula as a starting point in further analysis. In this case we analyze the pre tax margin
by completing a common size income statement to see the full operating
performance as outlined on the income statement. We also calculate three additional long-term solvency ratios to
further our knowledge of long term solvency from the Dupont formula.
d)
Read
an article in a professional accounting journal, Journal of Accountancy, and obtain nine ratios of cash flow
performance.
e)
Calculate
the nine cash flow ratios for insights about Mirage’s cash generating ability
and to what use Mirage puts it cash.
f)
Use
ratio analysis to make decisions.
g)
Use
ratios and common sized statements of the past to forecast future financial
performance, and resulting stock prices from that performance.
Starter
Corporation
Robert McDonald, University
of New Haven*
Overview
The case presents Starter Corporation in April, 1997 after it had reported poor performance in 1996. The firm’s sales had dropped 14% from 1996, breaking a five-year uptrend in sales, and the firm reported a net loss of $37 million. Starter had short term loans with ConnBank, most of which was secured by the firm’s assets along with a personal guarantee from David Beckerman, major owner of Starter. We find an analyst completing the initial analysis of Starter’s liquidity, both short and long term. The analyst has the typical ratios to illustrate Starter’s trends in solvency. The ratios tell a mixed story, with some ratios weakening ands some strengthening over the past two years. The analyst is hoping that the application of the Altman bankruptcy model will clarify the confusion of favorable and unfavorable trends in the ratios.
Somewhat complicating the bank’s position is the popularity of David Beckerman and the fact that his firm employees hundreds of residents in the New Haven community. Also a number of New Haven citizens are thought to have purchased Starter stock when it came public three years earlier. The bank would want to be on solid ground if it demanded more collateral from the firm, or an increase in personal guarantees from the majority owner.
Teaching Objectives
The case is intended for a course in financial statement analysis, in an MBA level or senior level undergraduate course. The case covers the analysis of short term and long term solvency, and the student will:
a) practice calculating ratios of short-term liquidity, such as, current, acid test, accounts receivable turnover, inventory turnover, conversion period, net trade cycle, accounts payable turnover, days of sales in receivables, days of inventory, and days in payables.
b) Practice calculating ratios of long term solvency, such as, total debt to assets, long term debt to assets, and times interest earned.
c) Practice calculating the Altman bankruptcy prediction model, and trying to see if it gives additional insight to a firm’s solvency prospects.
d) See the need to reconcile different messages from various ratios to get one unified message in order to make a decision. In this case the decision is to ask for a higher guarantee agreement from the majority owner, or leave the security as is for the loan.
BizE.com: On the Path to Profitability?
Kenneth Chapman and Janis.
L. Gogan, with Kathleen Fitzgerald*
Case
Objectives and Use
In
late May, 2000 Mike Devlin met with his business development team to discuss
the impending launch of BizE's first private-label Small Business Resource
Center. With 70 employees, BizE was nearing its one-year anniversary as a
provider of web-based products, services, information, expert advice, and other
resources for small businesses, through its BizE.com resource center. Earlier
in the spring, management had agreed to a shift in strategy: in addition to
continuing to develop the BizE.com brand, they would also market a
private-label version of the BizE web site. Many traditional "bricks and
mortar" companies were looking for new ways to serve their small-business
customers, and BizE's management team saw profit potential in the expertise and
relationships they had already developed.
In
this particular meeting, Devlin, the Vice President for Business Development,
wanted to know how BizE's first private-label site project was going. Although
a contract had not yet been signed, the client wanted the web site to go live
within the next two weeks. Devlin's team described several sensitive issues
that still required resolution before they or the client would feel comfortable
signing a contract. The case closes with Devlin dropping by the CEO's office to
discuss whether it would be appropriate to go live without a contract. The case introduction sums up the importance
of the initiative under discussion: "Everyone present understood the
importance of this deal to the company's future. BizE had already poured
extensive resources into the project, without a contract. A successful first
SBRC launch could put BizE on the path to profitability."
The
case is designed for use in an electronic commerce course or e-commerce module
in a strategic marketing or business strategy course. The case focuses on a
company that is trying to succeed using two different strategies. In the first
strategy, they want to become a premier destination site for small businesses,
and to earn profits through a combination of advertising, co-branding, and
revenue-sharing. In the second strategy, the company wants to leverage their
expertise and resources by providing a private-label version for large Fortune
1000 companies that serve small businesses. A marketing or e-commerce class can
focus on the different challenges in each of these strategies, and students can
discuss whether in the fast pace of change on the internet, it's possible to
win with a dual strategy.
The
case also serves as an introduction to the study of business alliances in
general. We contend that successfully managing business partnerships is a
central task in electronic commerce.
E-Business in Heineken USA:
Reengineering
Distribution
Gyeung-Min J. Kim and John
Price, Portland State University*
Case
Objectives and Use
This
case demonstrates how business efficiency can be enhanced through a category of
web-based business to business (B2B) E-business software called Collaborative
Planning, Forecasting and Replenishment (CPFR). By allowing customers to log
onto a vendor's CPFR system via secure
Internet connection (to review, revise, approve and execute demand forecases,
orders and delivery schedule) Heineken USA claims it cut its distribution
process cycle time by 50% and gained a 10% increase in sales revenues.
The
case illustrates how CPFR systems, as well as other Internet-based
technologies, can enhance relationships among business partners by enabling the
Heineken USA sales force to focus more on meeting customer needs than
processing paper work for order delivery.
Finally,
the case provides a means for students to explore, from Heineken USA's
perspective, the sustainability of IT-enabled competitive advantages in this
E-business landscape.
The
case was written for a graduate-level MIS course or E-Commerce course. Students
often misunderstand Web technology, focusing on the development of front-end
software (such as web storefronts). This case emphasizes that web-based
front-end development, combined with database management systems and decision
modeling technologies enabled the company to reengineer its organization and
its relationships with customers and suppliers. The benefits that they reaped
are tremendous.
Case
Synopsis
The
Heineken USA case shows how business efficiency can be improved through
Internet-based B2B E-business technology. As the world's first implementer of a
web-based collaborative planning system, Heineken USA enjoyed a 50% reduction
in cycle time, from determining the customer need to fulfillment of that need.
The benefits are simply strategic.
SkiShack
1997-1998
Malu Roldan, San Jose State
University*
Case
Objectives and Use
The
SkiShack case is intended for an upper division or masters level course in
electronic commerce and/or information technology management and strategy. This case is most appropriate to generate
discussion regarding funding options for start-ups or entrepreneurial projects
undertaken by an established company. A
large number of today's IT projects are undertaken in such environments and it
is essential that MIS students get some exposure to the uncertainties and
pressures involved. It is unusual in
presenting a start-up that was forced to take a less traditional route -- not
having the benefit of strong VC backing, the principals relied on friends,
family and angels. Professors can use
the case as the main basis for discussion and contrast it with other accounts
for start-up funding
Case
Synopsis
The
case describes the efforts of the founders of a travel industry start-up to get
their business established. It brings
the students to the point where the founders are contemplating whether to cut
their losses and shut down their operations.
The company is running out of funds and cannot get funding from angels,
friends, family or VCs. Such dire
straits also make it difficult to negotiate reasonable strategic
partnerships. The founders have to also
contend with their own values and commitments -- to take care of their
employees, to provide a return to their investors, and to pursue their dreams
of building a successful business.
Ultimately,
the company was acquired rather than going all the way to IPO (see follow-up
information in the teaching note). How
the founders negotiated such an outcome despite their company's weak position
is another source of interesting insights into negotiation and management
skills essential in today's information technology environments -- particularly
for small start-ups that could be acquired by companies such as Cisco and
Microsoft. The case gives students an
inside look at such transactions from the point of view of the acquired company.
* Contact Person: Thomas J. Vogel
Mail: Western New England College 1215 Wilbraham Road, Springfield, MA 01119-2684
Voice: (413)
782-1501 Fax: (413) 796-2068 Email:tvogel@wnec.edu
[1] Contact Person: Marjorie Platt
Mail: 404 Hayden Hall, Northeastern University, Boston MA 02115
Voice: (617) 373-4647; FAX: (617) 373 8814; e-mail: mplatt@cba.neu.ecu
* Contact Person: Robert McDonald
Mail: 300 Orange Avenue, West Haven, CT 06516
Voice: 203 932 7127 Fax: 203 931 6092 E-mail: armak@worldnet.att.net
* Contact Person: Robert McDonald
Mail: 300 Orange Avenue, West Haven, CT 06516
Voice: 203 932 7127 Fax: 203 931 6092 E-mail: armak@worldnet.att.net
· Contact Person: Janis L. Gogan
· Mail: Bentley College, 175 Forest Street, Waltham MA 02452-4705
· Voice: 781 891 2098; Fax: 781 891 2949; email: jgogan@bentley.edu
· Contact Person: Gyeung-Min J. Kim
· Mail: Portland State University School of Business, Box 751, Portland OR 97207-33721
· Voice: 503 725 3721
* Contact Person: Maul Roldan
Mail: San
Jose State University, One Washington Square, San Jose, CA 95192-0069
Voice: 408-924-3539 Fax: 408-924-3445 email:
roldan_m@cob.sjsu.edu