CASTING THE DIE

The early strategist, John McDonald, formed his thesis for business at the poker tables. It wasn’t the last time that gaming and strategy were to be coupled. At the time, the contemporary description of strategy was defined as, identifying goals, determining the methods to achieve them, and identifying the resources needed.

?The journey of strategic thinking from smoke-filled casinos to multi-billion-dollar corporations owes much to those that led the industry during a period of rapid growth.

FORMATIVE YEARS

Many trace the history of US gambling in America to Nevada Assembly Bill 38, however, the 1931 statute’s importance only became apparent after the Federal Government clamped down on “grey” and illegal gambling that existed across the country. The Nevada sunshine was free to disinfect the reputations of those practicing illegally and provide an open environment to formalize the structures of the business.

The Nevada casinos of the time were small enough to know the names, backgrounds and personalities of every employee – and many of the guests – without advanced player tracking systems. ?Their strategy was simple; get gamblers in the building.

Unlike many resort owners, Howard Hughes was not a casino guy, but had employed management systems in his manufacturing businesses and relied heavily on his team of accountants providing information for decision making. His properties all followed the same model with little strategic differentiation, managed efficiently and vertically, with strong reporting systems in place.

When gaming was permitted in New Jersey’s Atlantic City, the casinos needed people that knew about gaming, rather than hire established Vegas operators, the AC resorts hired regulators, business, finance and economics graduates, and others from outside Las Vegas.

This combination of newer properties, better operations, and a less remote location, made Atlantic City seem a better bet than Nevada’s fading neon. By 1981, just three years after the first property opened, Atlantic City had overtaken the Las Vegas Strip in terms of gaming revenue, becoming the casino capital of the USA.

The experience of Atlantic City proved the value of casinos, with customer visitation to destination markets increasing from 13% to the mid-30%.

In 1980, Harvard’s Michael Porter, published his seminal book on Competitive Strategy. The conventional strategic thinking emphasized operating efficiencies and scale (formed as an outcome of the Profit Impact of Market Strategy). Porter’s headline thesis was that within a competitive environment, any business must either be the price leader or drive customer value through differentiation, focusing on specific customer segments.

In Atlantic City, The Golden Nugget’s 506 rooms made it one of the smallest resorts, but was the highest grossing casino in a very successful market, proving Porter’s example. It was built for gamblers, owing more to Disney than The Dunes.?

All this was observed by two young executives’ Terry Lanni at Caesars’ Boardwalk Regency and Phil Satre at Harrah’s/Holiday Inn. The hotel-based operators were focused on selling rooms. Satre recalled his observation - the key difference between the hotel and casino businesses; in casinos it wasn’t about selling rooms, it was about getting the right customers in those rooms – as often as possible.

The Atlantic City experience had several important consequences for the gaming industry.

A new generation of casino employees and executives joined the industry. Many were educated, commercial, and dedicated to building careers off the floor.

Much of the Atlantic City ownership was corporate. Sophisticated forecasting, sales and reporting procedures were employed proving that scale was no challenge to modern management. It also highlighted the profitability of the gaming, when run properly.

However, the period could be summarized by Richard Schuetz, CEO of American Bettors’ Voice, who was one of the few to move from Nevada to New Jersey:

“Atlantic City was gifted an enormous opportunity. As casinos expanded into other jurisdictions, AC had not planned or prepared to offer the necessary infrastructure to become anything more than a regional gaming destination.??The tragedy of the city was Mr. Wynn leaving the market and then becoming an instrumental actor in reinventing the Las Vegas product through his vision, one that could have been possible in Atlantic City, if different decisions had been made.”

THE LION TAMER IN THE PALACE

J. Terrence Lanni graduated from USC in 1965 with a degree in business, where he undoubtedly read Peter Druker’s Managing for Results. ?After working as Treasurer for the Republic Corporation and for Gerald Ford’s campaign, he joined Caesars World in 1977. He was the right person, at the right place, at the right time.

Caesars was already the market leader in Las Vegas, but the company faced many challenges that by no means guaranteed success. It needed structure, control and organization, plus diplomacy, credibility and clear leadership.

Lanni provided all of these, rising through Caesars’ organization to President and COO from 1981 to 1995, with Henry Gluck as Chairman.

?His leadership philosophies values driven, prizing the potential of people and acting on opportunities. This was translated in building strong internal capabilities within the business, developing and empowering leaders to make collective, informed decisions, and having a perspective outside the existing constraints to deliver customer value.

?Within his 18-year tenure at Caesars World, the company surfed the BCG experience curve of growth. In addition to Caesars branded resorts, the company partnered with Native American Tribes, cruise liners, and formed joint ventures in the newly deregulated regional gaming market, becoming the market leader.

?After fending off several hostile takeovers, Caesars World was finally acquired by ITT in 1995 for $1.7bn.?

?In late 1993, The Luxor, Treasure Island and The MGM Grand all opened their doors. Opening a new resort was one thing (and the opening of The MGM Grand was far from smooth), but building the business that the high-level, hands-off Kerkorian wanted, was something else.

In June 1995, Lanni joined MGM Grand Inc as President, CEO and board member. He made immediate changes to the property, removing the literal theme, instead seeking to capture aspiration, which was implicit in Caesars Palace. Within a year he was Chairman of the company. Kerkorian was the majority shareholder, but MGM was Lanni’s show.

?At MGM, Lanni first built the foundations needed inside the company, investing in human capital, championing diversity from top to bottom, growing capability internally, notably he promoted those that had served in HR functions into senior operating positions. It was observed that he liked to end the day with a clean desk, a symbol of a well-run business.

?“Terry by nature was a consensus builder. He believed in diversity, and diversity of opinions. He wanted to know everyone’s thoughts before making decisions, and as a result, those were better decisions. Although the traditional top-down style has value, having a more inclusive management allowed MGM to grow in a more considered and dynamic manner, seeing more of the big picture than was historically possible in the industry.” ?Noted Alan Feldman, former MGM Executive and recent inductee to the AGA Gaming Hall of Fame.

Lanni would ask questions to his team. What are we good at? What are our capabilities? What do we need to grow our business?? How do we do it?

?After 5 years from developing the comparatively small MGM Grand Inc into one of the best run gaming companies in the country, Lanni retired. But he was to be back, his work was far from done.

IT'S NOT ABOUT THE CASINO

Much has been written about the impact Wynn had in reinventing Las Vegas, after selling his AC property for $440m in 1987. However, much of the success was due to the internal management model that Mirage Resorts had developed.

?“It’s always been that the non-casino story was the story. It was never the slot machines…they’re all the same, there’s no chance for differentiation…so it’s about something else…”

At The Mirage, it was all about entertainment and escapism, with Wynn’s proven top-down, culture heavy approach evident, focused on meeting customers’ emotional needs. His own personal growth as part of the increasingly sophisticated “baby boomer” generation had evolved from affluent escapism of their parents, and instead he observed the need to reinforce personal validation via luxury and aspiration. For Wynn, this evolution was to be found in Beau Rivage and Bellagio. His Treasure Island was for families. Each property had a different customer in mind, and he focused the offer to that segment. ?Others were watching what Wynn was doing with his customer intimacy strategy and coveted his success.

BUILDING AN EMPIRE

?Following Bill Harrah’s death in 1978, Mead Dixon was elected Chairman and he hired Philip G. Satre. In 1980, Harrah’s was acquired by Holiday Inn. Driving fast growth and running efficiently were fundamental to the strategy of the lodging giant.

?The multi-disciplinary corporation that was so prevalent in strategic thinking during the 1970s and 1980s was to end. Promus, the holding company of three prominent hotel chains, divested from non-gaming to focus on expanding their casino vertical. Satre’s high-growth experience was perfectly placed to take advantage of the recently legalized regional and Tribal casino and riverboat business, in a way that many established Las Vegas operators were not.

?The newly rebranded Harrah’s Entertainment rapidly expanded its regional footprint, yet all properties were effectively standalone casinos under a common brand.

?One of the characteristics found in Holiday Inn’s corporate culture was an openness to innovation and thinking outside the typical casino box. Satre did just that.

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n 1991, Satre was appointed the president of the Promus companies and immediately outlined a compelling vision that the company’s executives embraced:? A “One Company” philosophy to identify and apply compelling strategies and practices from the casino to the hotel business and vice versa.??

Almost immediately, he assembled an internal team to develop a new analytics platform, one focused on the lifetime value of customers and that could be distributed and operationalized across the rapidly growing number of riverboat and tribal casinos the company was developing. Satre’s vision of the hub and spoke model - establishing local casinos - feeding into flagship resorts in Las Vegas, Lake Tahoe, and Atlantic City - was taking shape.

?The underpinning of many decisions in the “One Company” program was customer-centricity and the added insight that gamers visited multiple casino markets, similar to hotel customers. Whereas loyal hotel customers across multiple markets received cross-property benefits, Satre believed the company’s gamers should receive the same, based upon their value as a Harrah’s customer. He applied his hotel learnings, transitioning Harrah’s from what appeared a loose collection of five properties, to a well-defined, branded company with platforms similar to hotel companies:? The first national casino chain was born.

?The national delivery system was both physical (bricks and mortar) and virtual, similar to successful hotel brands. Harrah’s first grew physically through both regional legalization and later through acquisition. The investment in virtual capabilities created company-wide, national back office and customer-facing technologies, bringing the benefit of consolidated scale and the establishment of applied-expertise, driven nationally and adapted to local conditions.

Shortly before the implementation of Total Gold loyalty program in 1997, Phil Satre posed the question to his team, “What is the greatest obstacle constraining our creation of customer value from the investments we’ve made in our national delivery systems?”?

One of his senior executives said, “We have F-16 planes that can do remarkable things, but we have Piper Cub pilots to fly them. We need to upgrade!” referring to the current expertise within the organization.

?Harrah’s already had the executive development “President’s Associates” program in place and instructor, Gary Loveman, joined the company from academia to an executive position, launching a bid to bring MBA graduates and data scientists to the company.

?This fundamentally reshaped the gaming industry. By investing heavily in the back office to analyze and interpret their data, which would be translated to improve business efficiency and assist in every aspect of management decision-making.?

In many ways, this was the antithesis of traditional casino operations, making decisions from the bottom-up, rather than top-down.

They tested, tweaked, refined and monitored, becoming one of the leading data-driven companies in the country. Growth in cross-market revenues drove strong same-store revenue growth throughout the 2000s.

“Everything we do to market Harrah’s is framed in terms of players’ decisions to visit, or not visit, one of our casinos. One measure of the effectiveness of our strategy is that many of our competitors have adopted similar programs after viewing our company’s performance over the past few years.” wrote Loveman.

In 2003, Loveman replaced Satre as CEO, with Satre moving to Chairman of the Board. In 2006 shareholders accepted a $29bn dollar private equity buy-out.

Using Day and Moorman’s examples in their study, Strategy from the Outside In: Profiting from Customer Value, one could observe that Lanni’s MGM was an Inside-Out company, one that prized internal management and learned capabilities to drive the business forward, whereas Satre’s Harrah’s/Caesars was Outside-In reflecting the strategy of learning from customer behavior to drive incremental customer value and growth.

CONSOLIDATION, CORPORATIZATION AND CUSTOMER SEGMENTATION

?With Lanni at the helm, MGM Grand acquired Mirage Resorts in 2000 for $6.4bn, and Circus Circus Enterprises, renamed as Mandalay Resorts, in 2005 for $7.9bn.

?Harrah’s had also gone on a buying spree, picking up international properties, regional casinos and dramatically increased their Las Vegas presence, including Barbary Coast, Imperial Palace, Planet Hollywood, Bally’s Paris and Caesars Palace.

?The challenge facing these new corporations was how to integrate the distinctive business models employed, requiring some management skill.

?Lanni believed that each resort had a different character and wanted to maintain that uniqueness, but also prized strong internal management and consensus-based decision-making, rather than the traditional top-down leadership model found in the companies he acquired. The resolution was to continue property level operations, with Lanni’s trusted aides implanted to build teams and implement the corporate culture, with each resort managed internally on a competitive basis.

?By contrast, Harrah’s managed expansion by adding nodes to the powerful central corporate hub.

The?Impact of consolidation strategies on the two large corporations was initially met with divergent outcomes.

Within the MGM portfolio, many resorts repositioned to attract more convention business and less leisure customers, and when it came to gaming customers, the resorts actively competed against each other– to the benefit of the customer and not the company.

?At Caesars, the centralized model found an increased share of both customer wallet and loyalty within the portfolio via targeted marketing and cross-promotion.

?After Lanni’s retirement in 2008, his successor, Jim Murren, had some big decisions to make.

He ended internal competition model, instead emulating Caesars’ centralized strategy, launching the “One Company, One Culture” initiative.

?After stabilizing the company after the financial crisis, the benefits from centralization were evident; reduced property level costs, and by integrating their players clubs across the portfolio to form Mlife (now MGM Rewards) they could compete with Total Rewards. The company also captured greater customer data and could implement a corporate wide investment strategy focusing on ROI.

?Also, by reducing internal competition, MGM could strategically segment their portfolio, managing the entire business as one, rather than separate resorts.

?As Las Vegas casino resorts shifted strategic emphasis from growth via acquisition to focusing on driving revenues from customer loyalty, with stunning outcomes. In 2011, 32% of Las Vegas customers always or mostly stayed at a particular resort. This was 57% in 2021. Consequentially, opening a new resort in Las Vegas without a database of customers has been more challenging in the past decade than any time in history, with a greater importance placed on strategy and positioning.

?By the 2020, many of those that formulated the management cultures and strategies had departed the industry. Lanni passed away in 2011, aged just 68. Wynn left the industry in 2018. Many of those that were part of the Harrah’s journey have retired, save Phil Satre, who serves as Chairman of Wynn Resorts.

ALL CHANGE

Today’s gaming companies are stacked with some of the brightest and rounded professionals in the country. Rather than focusing on the ongoing operational challenges, when Covid struck the industry, management could turn their attention to the strategic issues for a post-Covid recovery.

The first was advancing technology, including turning online, seeking to take advantage of the newly deregulated market of online sports betting and casino. Significant moves were made in the M&A space to buy technology, market share and launch brands. There are several advocates for the omni-channel strategy, with multiple touchpoints for customers, making the case that deepening the relationship will show benefits.

?The second was realizing that Las Vegas’ value had become more than the casino. Resorts needed to optimize revenues, eliminate under-performing elements, and price according to market demand.

?The introduction of sports, entertainment and major events have changed the nature of the business model. In 2023, despite gaming revenues being over $8.3bn, a record level for the Strip, this amounted to 35% of the total. Guestroom revenue totaled $6.9bn which was 29% of the total. The 2023 revenue generated from selling hotel rooms on the Strip was greater than gaming revenues in every year prior to 2022, and some forecast that room revenues surpass casino by the close of the decade, something unthinkable a generation earlier.

?LESSONS TODAY

?The AGA reported that casino gaming revenues grossed $49.4 billion in 2023. We could assume the same again for non-gaming revenues. Casino stocks are held by pension funds, debt by international banks, and real estate owned by REITS. If there is an American business success story, it is that of the gaming industry.

?We can chart this story in parallel with the evolution of post-war management theory and the successes seen by those that adopted that change.

?With early manager and owners overseeing the operations, using hierarchical, top-down processes, the business builders could monitor data and performance metrics. As the industry expanded to Atlantic City, the introduction of corporate systems from outside the casino space, allowed for greater planning and the influx of the first professional generation of managers from beyond the casino.

?Watching this centralized model emerge in Atlantic City was the next generation, who prized operational excellence, customer intimacy and within their segments, product leadership, which allowed for expansion and the ability to grow their casinos into corporations.

Concurrently, Wynn’s model of organizational culture and employee empowerment was innovative, particularly in the development of new properties. Wynn’s purpose was to encourage engagement engendering emotional loyalty.

?Howard Hughes may have been one of the earliest portfolio owners, but Terry Lanni was the man that had the vision for corporate gaming. At Caesars World he set the template for national expansion, providing a management and strategic outline. He did it again at MGM, except on a larger scale, building the business from the inside-out, starting with a strong internal core, MGM was able to absorb and grow through acquisition.

?Phil Satre spearheaded the rapid expansion in gaming, from running two casinos in one state, to building a national platform serving tens of millions of customers. He embraced tangential thinking, pulled from outside and applied those lessons with precision, structuring the perceived intangibility of loyalty, and using customers’ own decisions to drive value and change the business model.

Having tried several management models for corporate ownership in a competitive environment, Murren and Loveman resolved the dilemma, proving the effectiveness of the centralized method, promoting segmentation within, allowing for planned differentiation on a property level, which enabled to the diversity of the modern Las Vegas offer.

?Reflecting on the evolution of casinos over the past 75 years, we acknowledge the strategies applied and management employed from the top-down and bottom-up, shaping the business model from inside-out and outside-in, and the innovative implementation of technology to allow better decision-making, has enhanced both the bottom line and delivered a greater customer experience.

?There is little doubt that modern gaming management is a beacon cross the world. Other industries look at Las Vegas not just for hotel development and operations, but for strategy and management. We have gone from adopting management and strategic theory to shaping it.

This essay first appeared in Global Gaming Business Magazine.

Oliver Lovat is the CEO of The Denstone Group, that offers strategic consultancy in casino and hospitality development. His research topics are Las Vegas Customer Behavior and The Evolution of Competitive Strategy Within Casino Resorts.

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