Carbon Consulting Group

12/7/09

Harrah¶s: Spreading Their Bets Nationwide Team Carbon: Ben Simon, Demi Corrigan, Lauren Hylton, John Wood, Trent Krupa, and Chris Capp

Carbon Consulting Group

12/7/09

Harrah¶s CEO Gary Loveman is facing a pressing dilemma for his casino corporation. Currently, Harrah¶s is the leader in market share and has the best product placement of any of the top players in the game (MGM Mirage, Boyd Gaming, Las Vegas Sands, see Exhibit 1). But the casino industry is struggling to remain profitable. The decline in tourism has had a direct impact in the reduction of travelers to Las Vegas, Nevada, which is the top location for commercialized casino gambling. Harrah¶s has also taken on substantial debt ($5.5 billion for impairment on Caesar¶s Palace acquisition) which has raised concerns for company shareholders. Harrah¶s 60 casinos stretching across 12 U.S. states and 6 countries has allowed gamblers from all over the world to share in the Harrah¶s experience while their main competitors have taken on massive debt in large expansions of their Las Vegas and international businesses. i Should Loveman act aggressively and take advantage of his main competitors¶ problems by further expanding Harrah¶s internationally? Or should Loveman not risk making the same mistake of expanding during a recession that has plagued Harrah¶s competitors internationally? Should he wait for the economy to return to normalcy before introducing any drastic development plans? History of Casinos in the United States In the United States, gambling dates back to the very early settlers from England. Although Puritan beliefs strictly prohibited any form of gambling, English settlers had a strong attraction to the lottery, card playing, and other forms of gambling for ³gentlemen.´ Gambling remained popular into the early 19th century. Many municipalities used lotteries as a means to raise money for public projects, although many times the organizers would never actually make the promised pay-out; other forms of gambling, such as dog and horse races began to pick up steam in the early 1800s. The southern states, with New Orleans as a major hub, were the most receptive to gambling. River boats would run along the Mississippi River where wealthy businessmen would gamble away their earnings, often to professional thieves who made their living off of travelers dazzled by the thought of doubling or tripling their business transactions. ii

1

who subsequently placed its own restrictions.Carbon Consulting Group 12/7/09 As American¶s began moving out West. their sense of risk. the first slot machine was created in San Francisco in 1895. along with relieved worries about illegal activity. opened by Bugsy Siegel. The gold rush would bring gambling to California. when public opinion in California began to turn against gambling and major operations were forced into neighboring Nevada.iv In the 1950s. and the search for riches coupled perfectly with the gambling environment. The Senate¶s findings resulted in a massive crackdown on the criminal activities in Las Vegas and asserted massive pressure on heavy investments in the city. The opening of the Flamingo was underlined by celebrity appearances and an influx of affluent gamblers to the city. Eventually. In spite of intense regulations against gambling. One of the most notable casinos opened by a member of an organized crime family was the Las Vegas Flamingo. It was officially outlawed by the state of California in 1911. iii Nevada legalized most forms of gambling in 1931 and organized crime syndicates began investing heavily in casinos. adventure. until later in the nineteenth century. and subsequently forced to be used underground. the pressure was too intense and the organized crime families sold its stake in the Las Vegas casino industry to lawful buyers and publicly traded corporations. using tax evasion as their most powerful legal tool. The subsequent years. The Flamingo largely set the stage for the unparalleled dominance of Las Vegas over Reno as the city for high rollers.v 2 . an infamous gangster who used his underground influence to establish a business presence in Nevada. the US Senate opened up a series of investigations into the mafia influence in Las Vegas. resulted in an exponential influx of casinos to the area into what we now know as the modern day Las Vegas.

consumers are encouraged to take advantage of cheap travel deals to venture to a major casino and gamble. and Alcohol The casino industry has many complimentary goods and services. automobile. such as Las Vegas. Many major casinos have purchased and maintained their own hotels to maximize revenue and capitalize on the synergy between the hotel and the casino industries. bus. The strategy is that customers who make winnings on a particular night are more likely to come back the next day and gamble away their winnings. With most major casinos being located in concentrated areas. There are major compliments that serve to attract more consumers to gamble and extend their trips. Compensation.Carbon Consulting Group 12/7/09 Casinos as an Industry Travel. Hotels within a close proximity to a casino enable customers to gamble late into the night. Some are natural and others have been developed by the industry over time. and stay for several days or even weeks. sometimes going as far as compensating their hotel rooms. The major casino areas of the world. Reno. train. keno. Many of these compliments carry a symbiotic attraction to casinos while others can prove to be hazardous if undesirable conditions occur. The price of oil has fluctuated immensely in recent years and has had an impact on the price of airfare. losing²their winnings back. and other modes of transportation. The compliments to the casino industry proven to be the most dangerous are travel and transportation expenses. 3 . consumers are more likely to utilize other forms of gambling such as the lottery. Conversely. the majority of the world¶s population must travel long distances to reach these destinations. knowing that eventually the odds will lead the customer to spending±or in another word. and Atlantic City all benefit from a highly developed hotel infrastructure. If costs are low. or other substitutes. rather them push them away. Casinos encourage successful customers to stay. if the price of oil spikes and travel costs are higher.

but at casino/hotels so customers can easily access the gambling tables before and after the fight. 4 . casinos share a complimentary relationship with certain forms of entertainment. On top of boxing. This is a significant benefit to companies already wellestablished in the industry. Conversely. often free. fancy restaurants. customers are prone to spend their money in the expansively laid-out complex. showing the constraining obstacles being met by new companies. and thrill rides into their casinos. Fanatical boxing enthusiasts are drawn to Las Vegas to watch bouts between the world¶s best pugilists. The following examples detail each of the barriers to entry. like Harrah¶s. Lastly. The MGM Grand casino and hotel in Las Vegas has built an entire amusement park on its grounds. Entering the Game There are many barriers to entry in the casino industry. The availability of cheap. alcohol lowers inhibitions and customers¶ abilities to make intelligent decisions. alcohol is another major compliment to the casino industry.Carbon Consulting Group 12/7/09 Along with hotels. this is an obvious disadvantage to potential entrants. Since these individuals have traveled to the casino to engage in these other forms of entertainment. with these events occurring not at athletic arenas like Madison Square Garden in New York City. Casinos win back the money they lose on alcohol as a loss-leader. because it limits the amount of competitors fighting for customers and market share. the major players in the casino industry have integrated night clubs. and because gambling tables and machines are very inviting. making it difficult for any new entrants or startups to come in and establish themselves. These extra forms of entertainment serve to attract individuals to major casino areas who otherwise would not specifically choose to gamble their money as a form of entertainment. boxing being the most notorious in Las Vegas. and consumers are encouraged to spend their entertainment time and money at a casino that offers free drinks over a bar or night club that charges for those same drinks.

Each company has to meet stringent criteria and be subject to government¶s licensing regulations. they might not be able to if there is a ceiling placed on how many companies can be in a particular region. Lobbyists have stated that increased crime and addiction rates may be connected to the presence of casinos. These are thought to be some of the most effective barriers to entry because they are enforceable and highly regulated. 18 in few areas). Government and Legal Barriers There are many state and federal laws regulating casinos.Carbon Consulting Group 12/7/09 Real Estate Property Las Vegas and Atlantic City have centralized locations where a large majority of the customer base is concentrated. The prime real estate. A new entrant would also have to convince the local or state government (depending on location) to allow you to build or find an organization that is willing to sell or rent their property out. For simple reasons that it is inconvenient and away from the other attractions and entertainment. is owned by the major players. Governments can limit the amount of competitors by allowing a select few companies to exist in particular vicinity. Due to societal beliefs and stigmas associated with casinos and gambling. zoning requirements could also potentially serve as a significant obstacle. government regulations are high. most travelers to Las Vegas and Atlantic City will stay away from ³off-the-strip´ locations. Additionally. This industry also has high tax rates. If a company is looking to enter in an area that already has casinos. and the states that do allow gambling put an age limit on customers (21. there is oversaturation. there are 197 casinos in Las Vegas. Depending on what features your casino is going to require. 5 . state and local governments are eager to generate tax revenue off of casinos. located on what is called ³the strip´. Many states prohibit casinos. Casinos located outside this central area tend to not attract nearly the same volume of customers.

and maintain a casino that would even come close to the quality that a company such as Harrah¶s operates is large. After receiving all the proposals. and various other qualifications that were shown or described in their RFP. since there is no price differentiation in the gambling world. The state government will then ask for all the requests for proposals (RFPs) by any company that is interested in owning and operating a casino in that area. 6 . both monetarily and intellectually. run.Carbon Consulting Group 12/7/09 Licensing Aspiring developing companies must apply for gambling licenses where they wish to operate. This can be a long and difficult process to endure especially in newly created ³gaming districts´ where officials would rather deal with established companies. The jurisdiction considering legalizing casinos has to set the number of sites that are going to be available for prospective casinos. A $50 bet at a Harrah¶s is the same as it is at any small underdeveloped casino that doesn¶t offer the same amount of perks or rewards programs. High Capital There is a high level of capital needed to enter this industry due to the high fixed costs of operating a casino. Securing investment capital is very difficult. project specifications. They would also have to be able to compete with the many other big players in the industry. needed to develop. A trend in the expansion of casino gambling is the adoption of a zoning-merit model used by governments for issuing licenses. The amount of capital. the state chooses between candidates based on their experience. New entrants cannot enter this industry without a substantial financial investment.

Casino-goers (for table game players) believe that at least parts of 7 . The experience factor looms as a large discrepancy between buying a lottery ticket and going to a casino. The experience may be different if the boat is an actual river dwelling vessel. Lottery & Scratch Tickets Since lottery and scratch tickets are much easier to access (purchasable in practically every gas station across America) and less time consuming.Carbon Consulting Group 12/7/09 Alternatives to Casino Gambling Internet Gambling The most competitive substitute to the casino industry is internet gambling. gamblers do not need to leave the comforts of their living room to win big. they serve as a considerable substitute to casino gambling . but customers from the United States are still gambling online using companies whose offices are located outside the US. but certainly not a threat. but many remain permanently docked to reduce costs. There is a very low buyer propensity to substitute river boat gambling for casino gambling. as they offer a product that is an ³experience´. With the convenience of the Internet. very few river boat casinos are still in existence. Their popularity has diminished over time and they are currently viewed by the gambling world as a more nostalgic offering. especially considering river boats are only operated in the southeastern part of the United States. This can be assumed to be attributed to the taxes and income that the economy would lose from these establishments if internet gambling companies took hold. River Boats An endangered species in the casino industry. Their competitive advantage over traditional casinos is a perceived level of product differentiation. What is preventing internet gambling from gaining more of the market is the government regulations against it. There is a high propensity for gamblers to substitute. Internet gaming companies are prohibited in the United States.

There is a low buyer propensity to substitute. a player¶s skill factors into whether or not he/she wins. horse and dog racing bets are being placed on an item versus another item or group. with payouts coming on a ratio basis just like roulette in a casino. with lottery and scratch tickets. Sports betting is illegal in many states and that is the upside for casino companies such as Harrah¶s.Carbon Consulting Group 12/7/09 their upcoming bets are in their own control. since going to a horse or dog track provides the feel of being at a sporting event. Similar to casinos. There is a high level of perceived product differentiation. sports betting serves as a 8 . which contrasts the feel of being in a casino. Sports betting is legal in Las Vegas. Sports Betting Similar to horse/dog racing. If a better picks an underdog (team favored to lose a sporting event. The buyer propensity to substitute is quite low with sports betting. The stakes are similar to casinos. with knowledge of what horses to bet on being a critical factor for being successful in this form of gambling. winning is entirely due to chance. The relative price performance of horse and dog racing appears to be low. since location comes into effect with sports betting being allowed only in certain states. users of sports betting believe they¶re knowledge capital for a certain sport will serve as an advantage in placing bets. Overall. which has enticed many casinos on the strip to open sports betting centers inside their locations. unlike at a casino where at a table game. like the Super Bowl in 2008 when the heavily favored New England Patriots lost to the New York Giants) that better is likely to turn a small investment into a large reward. Horse Racing / Dog Racing Similar to sports betting. but are more reliant upon the amount of money to put down to increase profit (unlikely a horse will go off at a million to 1 ratio). there can be high price performance in this substitute (March Madness and Super Bowl create many betting options). the odds are usually within a limit. since there is not a great amount of firms who offer this form of gambling. The buyer switching costs are also low. Depending on the event.

Each dollar spent earns program points and Harrah¶s offers that person custom rewards based on their spending behavior. There is little competition between buyers.vi While the individual gambler has little bargaining power with a casino. Diamond and Seven Stars (high rollers). there is significant buyer power within this industry.1 times a year. Harrah¶s was the first to pioneer a system that rewards customers for the amount of gambling they do. With this resulting in over 320 million casino visits per year generating total revenues for casinos over $52 billion. Harrah¶s classifies customers in its Total Rewards program into four categories: Gold (entry level). they¶re also seen as a complimentary industry. they are elevated to higher levels in the program and offered larger rewards. Harrah¶s sends birthday gifts to Platinum level members and several gifts a year to their Diamond and Seven Stars members. In the past.vii This program has been highly effective in creating loyalty by establishing a penalty for gambling at other casinos. This has helped Harrah¶s differentiate themselves in the gaming industry and shift the balance of power away from the customer. A benefit for both parties is that Harrah¶s uses the 9 . To combat this. To strengthen a personal bond with the customer. Harrah¶s uses custom software to analyze all the ways an individual spends money at their locations. Spending money at Harrah¶s competitors means missing the opportunity to accrue points towards additional benefits. As customers spend more. In order to increase the value of their brand to the customer.Carbon Consulting Group 12/7/09 significant substitute. Harrah¶s alone operates 60 casinos in 12 US states. casinos have created their own versions of frequent flier programs which create switching costs for the individual gambler. but with sports betting centers being integrated into casinos. The gambler of today can choose between multiple forms of gambling among many diversified locations. Today. with the average gambler visiting a casino 6. Who Has the Power? Over 52 million Americans gamble on an annual basis. gamblers could only venture to Las Vegas and Atlantic City. Platinum. each customer can easily switch from one establishment to another without incurring any added costs. along with a limited amount of product differentiation from casino to casino.

viii Competitors of Harrah¶s MGM Mirage Formed in 2000 when MGM Grand acquired Mirage Resorts in 2000. Many of Harrah¶s competitors offer gaming as part of a Five Star resort hotel experience. and Mississippi. MGM Mirage is also considering the sale of the Bellagio. New York-New York. in 2005 for $7.9 billion. Bellagio. an activist investor. Towards the end of 2008 MGM Mirage agreed to sell its Treasure Island Hotel and Casino on the Las Vegas Strip. The hotel/casino sold for $775 million and was bought by Ruffin Acquisition LLC. Mandalay Resort Group. Kirk Kerkorian. and the Monte Carlo. Icahn is pushing for Kerkorian and the company to file for bankruptcy. Luxor. There are also casinos in other cities in Nevada as well as in Illinois. Michigan. The Total Reward program allows Harrah¶s to focus on their preferred market segment in the industry: the gamblers themselves.Carbon Consulting Group 12/7/09 program to make customers aware of special events and promotions that align with their individual interests.5 billion in stock and notes to create some liquidity and 10 . they do not focus on customers primarily looking for a vacation/entertainment experience. this was done in an effort to lighten its debt. They also do not advertise great food as a means of attracting customers. The Mirage. The organizational focus for Harrah¶s is on the gaming experience and connecting with customers who have the same objective. A big step towards being at the top of the casino world was when MGM Mirage acquired one of its main rivals. over hundreds of millions of dollars in MGM Mirage debt. MGM Mirage is comprised of Las Vegas Casinos¶ MGM Grand. ix Currently in the process of completing a mega-resort (City Center) between the Bellagio and the Monte Carlo casinos. MGM Mirage is one of the world¶s largest gaming firms.x There is a battle currently going on between Kerkorian and Carl Icahn. 40% of the firm is owned by its founder. While Harrah¶s does have entertainment in their casinos. MGM Mirage sold over $2. Kerkorian has had to scale back on what was supposed to be an $11 billion dollar project due to the decline in tourism and the economic recession.

Boyd Gaming Corporation 35% of the company is owned by Chairman William S. Florida. However. without the direct payoff of increased sales. MGM-Mirage has experienced the largest net loss in 2008 at just over $850 million. Boyd has 15 properties set across Las Vegas. Combined throughout all their casinos they have 22. China. cost of sales has increased significantly. and Mississippi. Property.000 slot machines and 450 table games.Carbon Consulting Group 12/7/09 improve its financial situation. Boyd and MGM Mirage co-own (50/50) Atlantic City¶s Borgata Hotel Casino. This casino is also struggling financially. Boyd.3 billion. Boyd used to be known for its Stardust Resort and Casino.86 from 3. and equipment accounts are nearly identical to the three prior years. Internationally. Also. plant. and asset turnover has remained literally identical to the prior year (meaning that the ratio between assets and sales is the same as in prior years). Boyd purchased Coast Casinos in 2004 for 1. This extremely large increase in debt will hopefully be used by MGM to invest very wisely in the coming years. These renovations have made MGM¶s costs to generate revenue higher. Indiana. If MGM does not utilize the cash inflows from this debt.xiii 11 . the company owns 50% of a hotel and casino resort in Macao. MGM has not taken on large amounts of new capital assets. Unlike the other major competitors. MGM¶s leverage has increased to 5.75 in 2007.xii Because of this massive increase in long term debt.xi Of Harrah¶s major competitors. MGM¶s liabilities have increased almost $3 billion in 2008. they may become bogged down by interest expenses and could find additional financing extremely difficult to secure. Weakened competition from MGM could enable Harrah¶s to offer new incentives to consumers without fear of retaliation. Illinois. lowering gross margins almost 6% to 40% total. but the fifth-largest gaming company in the country decided to demolish the resort to pave the way for Echelon Place. leading us to believe that a large amount of renovations have been done to existing facilities. without the actual purchase of new businesses. Louisiana.

this means that Boyd¶s assets are generating smaller amounts of revenue per asset compared to just two years prior. which would allow Boyd to make use of the $2 billion loan intended to finance Echelon. and has been suspended due to Las Vegas economy being affected by unemployment and a decline in tourism. Boyd enjoyed an asset turnover rate of . In 2007. Construction on this project not expected to begin for 3-5 years. Boyd¶s leverage was 3.xiv Boyd Gaming Corporation invested in approximately $600 million worth of property.Carbon Consulting Group 12/7/09 Echelon place is planned to be a mega casino. however. If Boyd is subject to these conditions in any of its loans. Expressed interest in acquiring bankrupt Station Casinos.xvi Although higher leverage offers the possibility of higher returns on equity during strong earning seasons. Some terms may require that a company¶s net income does not drop below a specific level. compared to an asset turnover of . in 2008 this number shot up to 4. it may be forced to pay back massive levels of cash due to the fact that they have performed so poorly in 2008.xv Boyd Gaming Corporation has also become increasingly leveraged over the past couple years. In 2008 Boyd announced its plan to build a casino/resort/spa in North Las Vegas. 12 . Likewise. This influx of debt means increased interest expenses along with a possibility of lower credit ratings by the major rating companies.39 in 2008.03. Project costs $4. the increased fixed costs associated with these investitures.56. along with the stagnation of revenue into 2008. and equipment between 2007 and 2008. Although Boyd has managed to maintain a relatively healthy gross margin of 45. many long term loans require specialized terms to ensure that a company will not default.8 million. plants. Once consumer spending improves officials of company have stated they¶d like to resume construction. during the fiscal year 2006.65%. Furthermore. has had a detrimental impact on the company¶s operating profits.24. spanning over 60 acres. it also means that the company has taking on more debt to finance its activities.

93% with an asset turnover of . 13 . gambling machines.xviii It appears that the large drop in 2008 net income for Las Vegas Sands comes from the massive influx of fixed assets and the depreciation that increases with it. 70% of the casino is owned by Chairman and CEO Sheldon Adelson. These margins were directly related to the high asset turnover of .26. This increase of depreciation has resulted in a direct expense to the company's income statement. The company was forced to lay off 500 employees.000 square foot casino/hotel is complete with a shopping. xvii 2008 was not a kind year to Las Vegas Sands. the company also had to suspend development operations in China as well as Las Vegas. Also. when less capital was needed to generate a large amount of sales from customers.83%.Carbon Consulting Group 12/7/09 Las Vegas Sands The Venetian Casino Resort (owned by Las Vegas Sands) brings a Venice-feel to the Las Vegas Strip. Las Vegas Sands was enjoying gross margins of 49. The company is currently in public offerings of their assets in Macau after failed attempts to sell the casino/hotels.In an effort to reduce some of its substantial debt. LVS hired Goldman Sachs to help negotiate efforts to buy back some of what had succumbed to over $10 billion in debt. and other cost of sales drivers. Due to the economic recession and the drop in tourists visiting China. The 12. and entertainment complex and lets visitors take a ride on a gondola through a replica of the Rialto Bridge. which included 100 managers. just at its Venetian Macau hotel. However. due to the increase in facilities.45. During 2005. this has resulted in increased costs of financing their business and ultimately higher interest expenses. combined with the economic meltdown affecting the gambling industry. Las Vegas Sands gross margins have steeply deteriorated to 36. meaning that the company has generated nearly half the revenue off of its assets as it did in 2005. dining. Las Vegas Sands' liabilities have greatly increased in the past several years. LVS additionally owns 3 casinos outside of Las Vegas in Macao. gross margins have dropped dangerously in fiscal year 2008. Also.

xix While there are a few prominent casino suppliers in the industry. What is certain is that this company may have purchased assets in locations that do not do well during a global downturn. 79) Suppliers in the casino industry are seen as relatively low commodities.xx With that. making this company especially vulnerable to fluctuations in the economic environment. many casinos (firms) use supplier¶s based on their location and proximity to their casino and are not loyal to one particular supplier. local politics play a role in casino development.Carbon Consulting Group 12/7/09 It remains to be seen whether or not Las Vegas Sands¶ massive increase in capital assets will begin to pay off after the recession eases and gambling consumers return to the casinos. and there are many suppliers in this industry. to the creative and sometimes lavish décor inside the casino. 2008. American Gaming Supply and Rose Brand. The effects of these supplies help casinos create a unique gambling experience for their customers. and is centered on relationships with the local politicians. suppliers do not have a lot of bargaining power with in the casino industry. ³Many suppliers are based on location. there are many government and state regulations that can factor into whether or not a casino can be built in a certain area. (Grant. casino gaming has a lot of legal issues and framework that they must adhere to and operate 14 . p. making their bargaining power low to this industry´. Suppliers The second source of µvertical¶ competition in the casino industry is suppliers. and the extent of gambling they can do. Suppliers in the casino industry supply a wide range of items from poker chips and gaming tables. Like a lot of industries. to slot machines and electronic games. External Factors in Casino Industry To analyze the external influences to the casino industry we first look at the political force. In gambling. Because of this. companies within the casino industry have a relatively easy time switching between different suppliers which in turn reduces the bargaining power of the supplier. Often times the bargaining power of suppliers goes hand in hand with the bargaining power of buyers. such as Cruzino. Many times.

as well as jobs for inhabitance. in many states persons under the age of 21 are prohibited from entering casinos and gambling. With the immense technology capabilities that are out there today. Also. casinos are able to profile their customers by tracking their gambling habits as well as predict their habits. The rate at which technology is advancing is astounding and certainly plays a role in whether to employ a dealer. casinos add a form of entertainment which can add value to a community by providing leisure options. Observably. so understanding and knowing the fine print makes things a lot easier to maneuver. 15 . and leave a rich one in a single trip. and the effect it has on travelers. Economic recession is correlated with the increase in oil prices. Due to political regulations. Any time there is a recession the effects are seen in the effect on tourism and travel. The social forces in the casino industry are clear. A casino offers customers the opportunity to enter their place of business a poor man. people can play poker online without leaving the comfort and privacy of their own home. The external economic forces within the casino industry are really evident in the current state of the economy.Carbon Consulting Group 12/7/09 within. Tourists are less likely to travel when the cost of oil is so high. casinos are also able to advance their security in an effort to reduce the physical labor required and minimize unnecessary loss. there is a ceiling placed on how many casinos can be in an area. many resort casinos are conveniently built in warm climate areas to take advantage of the weather. and costs increase for the casinos as their cost of freight and shipping goes up. With technology. Instead of traveling to a casino. Las Vegas being the dominate location for casino travel and has felt the impact in the reduction of people traveling and spending. For those customers living in cold-weather climates looking to seek warm-weather excursions. or install a black jack video game. Technologically. the Internet has had a major impact on the casino industry. taking an entire segment out of the customer market.

Loveman had implemented a plan to reduce employee health benefits in an effort to reduce costs. and quickly realized that with the cut backs many regular Harrah¶s employees could not afford health coverage. Loveman took no time to hesitate and quickly addressed the issue and said he had made a mistake. 16 . Before he came to Harrah¶s. Loveman brought his competitive spirit to the work place everyday. Gary Loveman was hired as Harrah¶s Chief Operating Officer. in economics from M. Loveman used technology to create a system that pushed employees at every level to not become complacent.xxii The former Harvard professor saw the value of tracking customer satisfaction and complaints by using surveys and tracking programs. The reports tracked customer satisfaction.D. Loveman schedules a period of four-hour conference call. Harrah¶s uses technology to make improvements in customer¶s experiences and found the value in connection between IT and customer and employee needs. Loveman obtained his bachelor¶s degree from Wesleyan University and his Ph. Loveman started Harrah¶s tremendously successful Total Rewards program that used sophisticated technology to track customer¶s actions at the casino. Every quarter. Loveman was an asocial professor at Harvard University. employees are constantly being pushed to do better and succeed more.I. along with tracking the daily profits in every department. Loveman used a scorecard to keep track of everything from revenue to customer satisfaction in every department. Loveman¶s attention to detail and value for harnessing intangible assets is what helped drive Harrah¶s profits through the roof. xxiii The prolific CEO continues to stay in touch with his employees and relies on their feedback to push the company forward. Loveman was able to draw from his knowledge of having worked in academia to drive Harrah¶s to success. where employees can call in and voice their concerns or problems they are having in their departments.xxi Loveman was then named Chief Executive Officer in January 2003. Not only does Loveman listen to their issues. he also acts on the problems to try to resolve issues.Carbon Consulting Group 12/7/09 Gary Loveman¶s Leadership In 1998.T. At Harrah¶s.

An enduring source of competitive advantage for Harrah¶s has been their on going investment in a customer loyalty program. The Harrah¶s brand is widely known due their presence in so many markets across the US and the globe.Carbon Consulting Group 12/7/09 Employees value the conference call since they know Loveman will act on their issues. Harrah¶s is better able to weather the negative financial climate. The Caesars brand is also widely recognized in the gaming industry and broadens Harrah¶s appeal to the ³high rollers´ segment of the market. Another competitive advantage for Harrah¶s is the strong brands they control. What resulted was the Total Rewards program. Gary Loveman. Harrah¶s has less exposure to any downturn in tourism. Harrah¶s enjoys the most diverse geographic distribution of casinos of any player in the industry. xxvi To assist with this effort many of the old school managers were replaced with top IT and marketing staff. This program not only rewards gamblers for the money they spend but it also provides Harrah¶s information on how to best satisfy their customers 17 . Former Harvard Business School Professor. In difficult financial times like we are currently experiencing. was initially brought in as COO for Harrah¶s with the idea to help Harrah¶s improve customer loyalty. Harrah¶s also owns the best known brand in the wildly popular world of Texas Hold¶em poker tournaments. Their major competitors have highly concentrated investments in a small number of resort destination casinos. Harrah¶s control of the World Series of Poker brand allows them to benefit from the recent explosion of interest in on-line and tournament play. xxv Their regional casinos spread out across the US allow customers to cut back on travel expenses by visiting Harrah¶s gaming facilities nearer to home. xxiv Competitive Advantage Harrah¶s has several factors that combine to form their competitive advantage in the gaming industry. and they can voice their concerns without fear of retaliation. With over half of their revenues coming from outside Las Vegas and Atlantic City. Harrah¶s was the pioneer of this concept in the gaming industry and they have a proven commitment in exploiting its potential.

5 billion of goodwill and other intangible assets were recorded as impaired (4. and higher discount rates. Due to the combination of harsh market conditions in the fourth quarter of 2008. In 2008. their financials should also be looked at without this impairment.6 in goodwill). Harrah¶s loyalty program is the largest in the business and this massive database of information provides Harrah¶s significant insights on how to best operate their business. lower valuation of assets. with $4. By using sophisticated programming.xxviii With 40 million members. A 6% decline would be mostly attributable to the recession and when looking at the numbers of Harrah¶s competitors. the impairment caused a $5 billion loss in retained earnings. Over the 2008 fiscal year. they were acquired by privateequity firms Apollo and TPG for $30 billion. opportunities.Carbon Consulting Group 12/7/09 needs. see Exhibit 2. After this. their operating profit and net income would only have decreased 6% from 2007 to 2008.xxix Since the main portion of this deficit was due to an anomaly.xxvii In its first two years of operation. stock ceased being traded on the New York. respectively. they are the most attractive company in the industry when compared to the drops in profit 18 . Chicago. Harrah¶s is able to spot individual and overall trends in gambling behavior.2 billion for operating profit and net income. and Philadelphia Stock Exchanges. they saw a $6 billion decline in equity and a $14 billion increase in liabilities (see Exhibit 3). Financial Analysis of Harrah¶s Despite having the largest market share in the industry. and threats. From this perspective. Harrah¶s sustained some significant financial losses over the past few years. they continued to grow over the next three years with sales growing 54% and net income 162%. $5. They are then able to respond by providing custom offerings to individuals based on their interests or by redesigning their casinos to satisfy changing customer tastes. As sales and cost of goods sold only declined slightly in 2008. This created large deficits of $3. Since they no longer were a publicly-held company.8 and $5.4 billion in cash. weaknesses. and debt in 2004. stock. Without the $5 billion loss. would be much lower. For a full analysis of Harrah¶s strengths. They acquired Caesars Entertainment for $9. Harrah¶s credited the Total Rewards program with doubling their profits.2 billion being in debt alone.

they went from $15 billion to $30 billion. of which a majority was due to debt.xxx This can be seen positively. They need to deleverage themselves. Using the technology to find out what the most popular game is. The same can be said for Harrah¶s operating profit. but became one of the highest of the industry by 2008. It dropped significantly from 2007. while also proactively incentivizing their customer¶s trips to their casinos. but Harrah¶s was still able to stay profitable.Carbon Consulting Group 12/7/09 and net income of Sands. Having high financial leverage is risky and can portray a poor utilization of borrowed funds. the better prepared they are to have the latest games and services. or what type of service their customers prefer will pay dividends in the long run. The more data Harrah¶s collects. especially in Macau. even without the impairment. Expansion Harrah¶s should continue to market themselves in the non-Las Vegas areas as a way to expand their brand power. but was still not in the red. The economic downturn caused all of the companies in the industry to suffer severely. at this time it is better to expand their brand in the US. 19 . While expanding globally is attractive. Their financial leverage was similar to that of their competitors. Harrah¶s liabilities have doubled from 2005 to 2008. Recommendations for Gary Loveman Technology Utilization Harrah¶s should continue to utilize the technology they have. MGM and Boyd. so they will have the capital to invest overseas when the time is right. Harrah¶s net income is the only one that was positive for 2008 fiscal year. and build upon it. as an opportunity for growth potential when the economy turns around (see Exhibit 4). however. Harrah¶s increased assets from $20 billion to $36 billion from 2005 to 2008 through purchases. with Harrah¶s being the only company²of the top 4 players²that has a positive operating profit.

It will be extremely important for the company to do as much as possible to enhance employee satisfaction. Also. management should engage in a Theory-Y style which suggests that employees want to do what is best for the company because it is also best for their interests. line employees will need to be cross-trained in multiple areas of the company so as to enable Harrah¶s to slim its ranks through natural attrition without affecting the customer experience. executive compensation should be frozen or even reduced to control excessive pay and benefits and provide incentive for executives to find ways to make the company more successful as the economy moves out of the current recession. this will both empower the employee and satisfy the customer.Carbon Consulting Group 12/7/09 Harrah¶s needs to focus on cost cutting measures to stay alive in the short term. Employees should be given the mobility and freedom to make on the spot decisions about customer complaints. These cuts should be to excess processes that do not serve to enhance the customer experience. Additionally. 20 . Spending should be allotted on improvements to employee break-rooms and free snacks and beverages to improve the overall work environment for employees. With the employees that are still with Harrah¶s after the initial cost cutting measures are completed. resulting in an overall move towards Harrah¶s goal of being differentiated through the customer experience and loyalty to the brand name (see Exhibit 5 for full-detailed Balanced Scorecard). Also. Any unnecessary administrative staff should be removed to lower operating expenses.

Carbon Consulting Group 12/7/09 Exhibit 1 Product Placement Map 21 .

Carbon Consulting Group 12/7/09 Exhibit 2 Harrah¶s SWOT Analysis  Strengths Diverse operations Prime casino locations Well placed undeveloped land Loyalty program  Opportunities Macau China Northeastern USA Cost reduction program Complimentary Investment  Weaknesses Large debt to acquire Caesars casinos Las Vegas operations dependant on tourism and healthy economy  Threats Government regulations Casino proliferation and market saturation Public opinion Natural disasters 22 .

Carbon Consulting Group 12/7/09 y Does not include Impairment Exhibit 3 23 .

Carbon Consulting Group 12/7/09 y Includes Impairments Exhibit 4 24 .

Carbon Consulting Group 12/7/09 Exhibit 5 25 .

2003 Ibid xxvii D Becker.edu/subscribe/co/factsheet xiv Ibid xv Ibid xvi Ibid xvii Las Vegas Sands http://0-premium. The McKinsey Quarterly.ca.uri.html iii Ibid iv Ibid v Ibid vi M. F. Sixth Edition.com. E. Outlook Ibid xxii xxiii Thomas. (2007. Robert.helin.Carbon Consulting Group 12/7/09 End Notes Harrah s Entertainment Inc http://0premium.com.com.helin.com.helin.xhtml?ID=ffffryxjrjfjsxctjx ii History of Gambling in the United States http://www. Outlook xxiv Ibid xxv xxvi www. & Dutra.edu/subscribe/co/factsheet. September 2009 viii ix i D Norton. Gambling on Customers. Harrah s Knows What You Did Last Night. A. Harrah s Entertainment Inc xxx Ibid 26 . Levinson.com. October). Exploring the Mindset of the High Performer.hoovers.edu/subscribe/ind/factsheet xx Grant.edu/subscribe/co/factsheet Ibid xi Ibid xii Ibid xiii Boyd Gaming Corporation http://0-premium..com. Levinson Ibid. R.hoovers.gov/crb/97/03/hapt2.. & Thomas. 2008 x xxi Shill. 2001 vii www.com..eweek.uri. January). http://0-premium. Harrah s Hits Customer Loyalty Jackpot. December 12th.com . www. June 6th. Blackwell Publishing.uri. Investor Presentation. J. 2003 xxviii xxix Ibid.uri.com.library. July 14th.cio.sas. 2007 MGM Mirage . W. (2005. Harburg. CRM Strategy: Make Every Customer More Profitable.hoovers. How to Create a Culture of High Performance.uri. R.edu/subscribe/co/factsheet xviii Ibid xix Gambling Resorts and Casinos http://0-premium.harrahs. Contemporary Strategy Analysis. J.hoovers.hoovers. www.helin.helin.