BUS 478: Business Strategy Case Synopsis

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1 BUS 478: Business Strategy Case Synopsis Richard Le: Ryan Lalonde: Tianhan Xia: Xyleen Haban: November 10, 2014

2 Firm History Groupon is a publicly owned daily deal company, which trades on the Nasdaq exchange. Groupon serves as a platform for vendors to offer their goods or services to online shoppers at a discount, generally to either upsell the consumer or create recurring business. The company was founded by Andrew Mason in 2007 in Chicago, Illinois, and launched in major American cities in 2009, increasing its revenue 15x from that time to Groupon s business model leverages the purchasing power of buyers to negotiate discount offers from vendors, and earns a percentage of the profits produced from the promotional feature (Hill & Jones, 2012). Starting in 2011, strong competitors, such as LivingSocial, Google Offers, and other localized daily deal companies, flooded the market and began to decrease Groupon s growth and market dominance. The Company Today Still a publicly traded company on the Nasdaq exchange, Groupon has a market capitalization value of over $5 billion dollars and generated $757 million dollars in revenue in their third quarter for Operating with a flash sales e-commerce model, Groupon s current share price is actually much lower than their initial public offering. Jumping to a staggering $29.52 per share on their opening day on the Nasdaq, Groupon s share price as of November 7, 2014 is $7.50 (Groupon, Inc. 2014). Still a juggernaut in the deal-of-the-day market, perhaps the biggest competitor Groupon has is the online marketplace created by LivingSocial. General Environment Demographic Using the Internet as its sole platform, Groupon users are young and technology-oriented. Ninetyseven percent of Groupon s subscribers are between 18 to 54 years old and over 82 percent of them have obtained a bachelor or graduate degree. Also, 77 percent of their subscribers are females (Wu, 1

3 2011). With most of their offers targeting people in urban areas, those living in bigger cities are their major subscribers. Economic While the recession from 2007 damaged a lot of business, it actually created incentives for people to save up by using coupons. A study indicated that 89 produce of the Americans are regular coupon users (Wu, 2011). Established in 2007, Groupon entered the market with a promising future. Technological With technological advancements, the Internet is becoming increasingly accessible among people. The popularity of mobile apps also helps the prosperity of Groupon. Groupon mobile apps are available on all the major mobile app stores, including itunes, Google play and Windows phone app store. Through the convenience of push notifications, it is easier than ever to promote the deals to their subscribers. Global With coupons being a trend after the recession, many companies emerged as potential competitors for Groupon. Google launched Google Offers in 2011 and it is gradually taking up the market. However, with Groupon s global recognition, it still has a promising future ahead. Legal Groupon gives people the joy of saving money; however, this also comes with the threat of some legal issues. Often times, the consumers find themselves in a situation of being victims of false advertisement. Misleading and dishonest marketing claims may cause Groupon some costly lawsuits. Also, overselling deals and the broken coupon promises would also cause Groupon some additional legal issues (Bullock, 2012). 2

4 Sociocultural Couponing is an old concept, however, its popularity has been rapidly growing after the recession in People are becoming more aware of saving money and the accessible electronic coupon meets their demand. It is traditionally believed that females are more aware of saving up; the ratio of Groupon s female subscribers supports this claim. Industry Environment Porter s Five Forces 3

5 1. Threat of New Entrants With the marketplace becoming increasingly digitized, the threat of new entrants in the daily deals industry is high. Many start-ups and larger companies have attempted to imitate Groupon s business model as it does not require a significant amount of capital. In this twosided platform, a primary barrier for new entrants would be establishing a large and active network of both consumers and merchants. 2. Bargaining Power of Suppliers (Merchants) Merchants include all the vendors that collaborate with Groupon in order to connect consumers with their products, services, and/or getaways. Merchants have moderate to high bargaining power, which can decrease depending on the size and scope of their business, as well as their reliance on Groupon to increase consumer traffic. The bargaining power is quite low for merchants that depend on Groupon s daily deals to bring in new consumers. On the other hand, well-established merchants with loyal consumers do not necessarily need Groupon to grow their business. 3. Bargaining Power of Buyers (consumers) Due to low switching costs and a lack of differentiation, the bargaining power of buyers is relatively high. Many of Groupon s consumers are price sensitive and will look for better deals that competitors may offer. While consumers cannot dictate the pricing of deals, demand will decrease if Groupon fails to offer a wide variety of products, services, and getaways at an attractive price. As the majority of products and services offered by Groupon are not differentiated, it is difficult to build brand loyalty. 4

6 4. Threat of Substitutes Substitutes for Groupon include offline deals in the form of traditional coupons offered by newspapers, magazines, and media companies for similar products and services (Groupon, 2013, p. 9). Consumer loyalty programs that provide recurring discounts and deals can also be considered a substitute. This may be more attractive to merchants because it cuts off Groupon as an intermediary with consumers. 5. Rivalry With several companies targeting the same consumers and merchants, rivalry in the daily deals industry is high. The lack of differentiation and low switching costs for consumers, results in price competitions and contributes to the intensity of competition. If Groupon is unable to retain consumers, merchants have little incentive to promote their products and services. Without positive network effects, it becomes increasingly difficult for Groupon to sustain a long-term competitive advantage in the daily deals industry. Current Situation Business Level Strategy One reason why Groupon has grown so quickly is because it focuses on one thing, selling coupons to the consumers (Wu, 2011). Groupon is focusing on differentiating their offers in order to effectively compete with rivals. Groupon offers customized services to people living in different cities or countries to ensure that they are meeting a variety of people s needs. In addition to that, Groupon also came up with the idea of flash sale ; a system of limited time offers to differentiate their deals from the rivals (Johnson, 2014). 5

7 Corporate Level Strategy To be the starting point for consumers with respect to local and mobile commerce is at the core of Groupon s corporate strategy. The company aims to establish itself as the largest marketplace in the daily deals industry by leveraging its global presence and scale (Groupon, 2013, p. 5). As part of their growth strategy, Groupon has acquired and integrated complementary companies into their existing business. This has pushed the company to expand their daily deal offerings into other categories and subcategories (Groupon, 2013, p. 6, 76). International Strategy Groupon expanded internationally in 2010 and now operates in 48 countries. The company: organizes their operations into the following segments: 1. North America: United States and Canada; 2. EMEA: Europe, Middle East, and Africa; 3. Rest of the World : Remainder of Groupon s international operations. As a result of several acquisitions, a key element of Groupon s strategy is to globalize the many platforms and processes that have been inherited from acquired companies. By the end of this year, the company plans to improve global operations by introducing website enhancements beyond the North American segment, which include a personalized homepage tailored to consumer preferences (Groupon, 2013, p. 5-8). Groupon acknowledges the increasing challenges of adapting to changing markets and the relevant regulatory issues across borders. For the coming years, Groupon aims to improve consumer awareness by establishing an even greater mobile presence around the world that will enable them to offer more personalized goods and services. 6

8 Current Strategic Challenges Stagnated Growth The daily deal industry saw tremendous growth from 2008 to 2013, increasing in revenues by over 332% during that time (Smith, 2013). Growth has since decreased sharply, and has moved from a growth stage to the industry shakeout stage. It does still continue to growth steadily however at approximately 4% a year, and is projected to continue to do so until 2018 (Smith, 2013). Competition between remaining industry players is still intense however, as most gains need to be made at the expense of other companies, since the value of daily deals (or lack thereof) is already well known from a vendor standpoint. Loss of Market Share Although Groupon is still the market leader in the daily deal industry, holding a total market share of 59.1%, there are now over six hundred companies in the daily deals industry and more potential competitors are entering the industry, notably Google Offers and LivingSocial (owned by Amazon) (Smith, 2013). With the increasing number of competitors in the daily deal industry, and cutthroat business practices amongst them, Groupon has seen much of its market share decrease. Although the industry is expected to grow at 4% annually in 2013, it still does cover the market share Groupon has lost, and continues to lose, to it competitors. Future Strategic Outlook Strategic Partnerships While Groupon is still the most recognized daily deals leader in the market, a flood of competition has tried to penetrate this market with several differentiating factors. Companies like JackThreads and Shadora are quickly taking up market share by bringing on key strategic 7

9 partners that can leverage them as another means to sell their inventory (Fallon, 2014). An upcoming trend in this market seems to be to partner the flash sales e-commerce business model with established retailers that could use the daily deals websites as an extension of their own sales. HotelTonight is another company that has strategic partnerships with hotels and offers tonight-only deals based on those partnerships (Schaal, 2014). Mobile Applications and Advertisements In what appears to be a growing trend, mobile applications and ads are becoming a vital part of the e-commerce space. Leveraging those advertisements and the revenue that can be generated from them could be essential in staying competitive in a market that is now becoming more reliant on this type of consumer traffic. Groupon has already delved into this space by offering $10 credit on their Groupon accounts when signing up for their mobile application. Approximately 50% of Groupon s transactions are through their mobile application and their application has over 80 million downloads (Schaal, 2014). Promotions on mobile applications are also a great way to compete against e-commerce businesses that have already begun to establish strategic partnerships with retailers and other businesses. As an example of this, Groupon has launched promotions such as one-day hotel deals and other temporary deals to try and combat companies such as HotelTonight, a company that leverages strategic hotel partners in their business model (Schaal, 2014). 8

10 References Bullock, D. (2012, March 21). 5 Reasons consumers are turning against Groupon. Retrieved November 09, 2014, from Carlson, N. (2011). Inside Groupon: The Truth About the World s Most Controversial Company. Retrieved from Fallon, N. (2014). How to Succeed in the Daily Deals Industry. Retrieved from Groupon. (2014). About Groupon. Retrieved from Groupon. (2013). Annual Report. Retrieved from E2NTR/ x0x741381/6FBF54CB-F84C-4E2C-ACF8- B B7/2013_Annual_Report.pdf Hill & Jones (2012). Strategic management theory. Cengage Learning. Johnson, L. (2014, January 15). Groupon pushes into flash sales to reinvent daily deals model. Retrieved November 9, 2014, from Smith, Deonta. (2013) Daily Deals Sites Industry. Retrieved November 9, 2014, from IBIS World: Schaal, D. (2014). Groupon Launches Tonight-Only Hotels in its Mobile Apps. Retrieved from Yahoo Finance. (2014). Groupon, Inc. (GRPN). Retrieved from https://ca.finance.yahoo.com/q?s=grpn Xu, F. (2012). Can Groupon.cn Be Another Groupon? A Comparative Study on Online Coupon Sale in USA and China. International Proceedings of Computer Science & Information Technology, 52. 9

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