Good to Great in Gaming
By Andrew MacDonald and Bill Eadington
“The fox is a cunning creature, able to devise a myriad of complex strategies for sneak attacks upon the hedgehog. Day in and day out, the fox circles around the hedgehog’s den, waiting for the perfect moment to pounce. Fast, sleek, beautiful, fleet of foot, and crafty – the fox looks like the sure winner. The hedgehog, on the other hand, is a dowdier creature, looking like a genetic mix-up between a porcupine and a small armadillo. He waddles along, going about his simple day, searching for lunch and taking care of his home.
“The fox waits in cunning silence at the juncture in the trail. The hedgehog, minding his own business, wanders right into the path of the fox. ‘Aha, I’ve got you now!’ thinks the fox. He leaps out, bounding across the ground, lightning fast. The little hedgehog, sensing danger, looks up and thinks, ‘Here we go again. Will he ever learn?’ Rolling up into a perfect little ball, the hedgehog becomes a sphere of sharp spikes, pointing outward in all directions. The fox, bounding toward his prey, sees the hedgehog defense and calls off the attack. Retreating back to the forest, the fox begins to calculate a new line of attack. Each day, some version of this battle between the hedgehog and the fox takes place, and despite the greater cunning of the fox, the hedgehog always wins.”
From Jim Collins, GOOD TO GREAT.
“There is a line among the fragments of the Greek poet Archilochus which says: ‘The fox knows many things, but the hedgehog knows one big thing’. Scholars have differed about the correct interpretation of these dark words, which may mean no more than that the fox, for all his cunning, is defeated by the hedgehog’s one defense. But, taken figuratively, the words can be made to yield a sense in which they mark one of the deepest differences which divide writers and thinkers, and, it may be, human beings in general. For there exists a great chasm between those, on one side, who relate everything to a single central vision, one system less or more coherent or articulate, in terms of which they understand, think and feel – a single, universal, organizing principle in terms of which alone all that they are and say has significance – and, on the other side, those who pursue many ends, often unrelated and even contradictory, connected, if at all, only in some de facto way, for some psychological or physiological cause, related by no moral or aesthetic principle; these last lead lives, perform acts and entertain ideas that are centrifugal rather than centripetal, their thought is scattered or diffused, moving on many levels, seizing upon the essence of a vast variety of experiences and objects for what they are in themselves, without consciously or unconsciously, seeking to fit them into, or exclude them from, any one unchanging, all-embracing, sometimes self-contradictory and incomplete, at times fanatical, unitary inner vision. The first kind of intellectual and artistic personality belongs to the hedgehogs, the second to the foxes…”
From Sir Isaiah Berlin (1953), THE HEDGEHOG AND THE FOX.
Jim Collins’ classic business book, BUILT TO LAST (1994), was followed by his 2001 contribution, GOOD TO GREAT, where he examined the principles of companies that had made the leap from being “merely good” to being “great.” In conducting the research for his book, Mr. Collins focused only on companies that were able to progress from a track record of good performance to a sustainable period of “great” performance in the long-term, i.e., 15 years or more. As such, his conclusions are about principles that deal with transformation: principles that allow a company to transform from Good to Great and stay there. Collins borrowed from Sir Isaiah Berlin to develop his essential principle in GOOD TO GREAT: the Hedgehog Concept. He defined this as “a single organizing idea, a basic principle or concept that unifies and guides everything within the organization.” It does not matter how complex the world really is; a Hedgehog Concept reduces all challenges and dilemmas to simple – indeed almost simplistic – Hedgehog ideas. Anything that does not somehow relate to the Hedgehog Concept has no relevance.
The good-to-great companies studied by Mr. Collins and his team were found to have built and zealously focus on strategies that were founded on three key dimensions.
1. What is it that you can do better than anyone else in the world? (And, equally important: what can you not do the best?) This discerning standard goes far beyond core competence. Just because you possess a core competence does not necessarily mean you can – or ever will – be the best in the world at it. Conversely, what you can be the best at might not even be something in which you are currently engaged.
2. What drives your economic engine? All the good-to-great companies analyzed by Mr. Collins attained piercing insight into how they could most effectively generate sustained and robust cash flow and profitability by indentifying and focusing on a single common metric, i.e. profit per x that had significant impact on their economic performance.
3. What are you deeply passionate about? The good-to-great companies focus on those activities that ignite their passion. The idea that needs to be carried forward is not to stimulate passion but to discover what makes a company passionate.
The intersection of these three dimensions becomes the core defining Hedgehog Concept for the organization. Such a concept should not be a blindingly complex statement of strategic objectives, but rather it should follow Occam’s razor by offering the simplest and best possible solution for a variety of challenges.
When we apply these ideas to gaming companies, can we find some that have made the leap from Good to Great by following a defining Hedgehog Concept? We begin by looking at a couple of gaming organizations that may have taken that leap and arguably can be characterized as having achieved greatness.
Wynn Resorts is a relatively new company founded by Steve Wynn which went public in October 2002. Wynn is often given credit for having been the visionary and driving force who redirected Las Vegas and helped transform it from what it was into a world-class destination – arguably the world’s most popular tourist destination – from the end of the 1980s to the present. Indeed, he is sometimes referred to as the Walt Disney of the gaming world.
In 1989, when Wynn and his then-company Golden Nugget (later to become Mirage Resorts) built and opened The Mirage on the Las Vegas Strip, Las Vegas carried a somewhat mixed reputation among potential visitors. Its casinos could be divided between “carpet joints” and “sawdust joints,” and the popular casino design of the day could unkindly be characterized as “modern bordello.” The business philosophy of many casinos was that every part of the operation had to serve as a loss leader, with a purpose of funneling customers into the casino, which would serve as the only real profit center and “cash cow” for the entire operation.
The image of Las Vegas up to that era had more than a few rough edges. Las Vegas was considered by many – though not all – as being “cheesy,” “tawdry,” “mob infested,” “cheap,” and “nasty.” All-you-can-eat buffets were a cornerstone of the destination’s marketing image. Cheap rooms, cheap food, escort services, and a reputation tarnished by years of mob influence and political scandal had left many cold to the idea of visiting Vegas. As a result, Las Vegas was tapping into only a moderate portion of its potential market.
But Steve Wynn saw something different – a vision of a Las Vegas reborn – that would cater to affluent Americans and foreigners who were prepared to spend more for quality, and who would willingly extend their leisure and after-hours lifestyles to the places they visited on holidays. Wynn’s vision was that resorts in Las Vegas could be attractive to those who enjoyed the finer things in life and were prepared to pay for them, and were also attracted to the excitement of the casino floor and the accompanying resort ambience.
Casino resorts possess a unique structure that allows two options for payment of the services they offer: they can be paid for directly and at full retail price by customers who so choose, or payment can be made as part of a bargain between the casino and a playing customer who will be rewarded by discounted or free services – “comps” – in exchange for “action” at the table games and gaming devices. This added dimension of making the cost of the visit itself a gamble provides a little more excitement and adrenaline to the Las Vegas adventure. Wynn’s casino resorts mastered this fine balance between explicit and implicit pricing.
The Mirage was one of a number of major casino developments in Las Vegas by Steve Wynn that set the foundations for the new Las Vegas. His Nevada ventures began with refurbishment of the Golden Nugget in Downtown Las Vegas in the 1970s, and these were followed by the building and opening of The Mirage (1989), Treasure Island (1993), Bellagio (1998), and Wynn Las Vegas (2005.) The Mirage, Bellagio, and Treasure Island are now owned and operated by MGM Mirage, which bought out Wynn’s original company in 2000. Wynn had also opened the Golden Nugget in Atlantic City in 1981, the Beau Rivage in Biloxi, Mississippi in 1999, and the Wynn Macau in 2006, and had partnered with Circus Circus to open Monte Carlo on the Strip in 1997. It was clear early on that the creation of extravagant casinos was Steve Wynn’s true passion. It was also clear that attention to detail and to execution of the resort experience were something that Steve Wynn put ahead of all other priorities.
This proclivity to build outstanding and dramatic casino resorts is obviously a part of Steve Wynn’s overall Hedgehog Concept. Whether he would identify it as such would be a question that only Mr. Wynn himself could definitively answer. However, we can examine the three key dimensions in order to identify what are perhaps the defining elements of the Wynn formula.
Question: What are Steve Wynn and the management leadership at Wynn Resorts deeply passionate about?
Answer: Creating and designing incredible, high-end integrated casino resorts with matchless attention to detail, along with simple but unmistakable elegance that caters to the needs and desires of discerning gaming customers.
Under Steve Wynn’s leadership, Wynn Resorts – and before that company, Mirage Resorts – time and again built the most impressive casinos in their respective marketplaces. Costs were often not an important consideration; rather, getting it right and then executing the delivery of the product to the customer was paramount. As a result, everything at a Wynn resort was well executed, even from the opening day. (The contrasting histories of other Las Vegas casino openings, in terms of problems that quickly became apparent, serve an interesting illustration for the ability of Wynn’s companies to execute. Wynn’s main Las Vegas Strip properties – The Mirage, Bellagio, and Wynn Las Vegas, opened without missing a beat; in contrast, there were far rougher openings at the MGM, the Luxor, and the Venetian, among others. Wynn clearly infused his passion to get it right the first time into his organizations.) The only time Steve Wynn missed his market on a casino opening was in Biloxi, where his company was criticized for providing far more quality and elegance at the Beau Rivage than the market really wanted.
In summary, Steve Wynn and his companies have been highly committed to developing outstanding physical facilities, and then supplying them with activities, amenities, and attractions that would exceed expectations, accompanied by delivery of high quality service to pampered and high-expectation guests through a corporate culture built around the principles of employing, developing and retaining the best staff in the industry.
Question: What is it that Wynn Resorts can do better than anyone else in the world?
Answers: Accessing capital markets to fund the development of the most expensive resort projects in the world. Positioning resorts to be the most desirable high-end properties in their respective markets. Accumulating a large number of the world’s most exclusive high-end brands and providing a showcase for these in an opulent environment under one roof.
From his earliest dealings in Las Vegas shortly after he arrived in the early 1970s, Steve Wynn truly mastered the “Art of the Deal.” Under the tutelage of Nevada banker E. Parry Thomas, he cleverly parlayed his initial stake in Las Vegas to build up his financial resources, which soon allowed him to gain control of the Golden Nugget, after which he built one spectacular casino resort property after another, often using cutting edge and occasionally controversial financial vehicles and strategies.
The name Wynn has become synonymous with “top of the market” in every market where they operate. Where other companies were cost conscious, Wynn’s companies would do whatever it took to get it right, and the ultimate judge on “what is right” was Steve Wynn himself. There was a sense that, whatever the cost, the quality of product would be able to generate the revenues and cash flow to justify the investment and reward the shareholders. Time, and the financial experience of Steve Wynn’s companies, have demonstrated the workability of this thesis, but it is not one that is easily mimicked by others.
Wynn Resorts – and Wynn’s predecessor companies – reinforced their “high quality, high expectation” mystique by creating unsurpassed elegance in shopping options, dining experiences, and entertainment extravaganzas in their various properties by attracting and contracting with the most prestigious retailers, world renowned chefs, exclusive auto dealerships, exotic animal trainers, and unbelievable acting troupes. Wynn Resorts and Steve Wynn personally also have accumulated a priceless art collection that has become part of the signature for exclusivity and style at the later properties.
This strategy creates an aura of anticipated experience for preferred guests at Wynn’s opulent resorts. Whether it is at the green baize of the baccarat table in the casino, the front row seat in the showroom, relaxing in the suite, or enjoying the premier table in the restaurant, the experiences generated are undoubtedly highly memorable, if not unforgettable.
Other casino and hotel developers have imitated the Wynn formula, including Sol Kerzner with the Atlantis development in the Bahamas and Lloyd Williams with Crown Resort in Melbourne, Australia (now owned and operated by James Packer’s PBL Corporation). However, no one has gotten the entire package “right” in the same way that Steve Wynn has done, by linking construction and design with opulence and service, to create a high level of customer expectations and then consistently deliver on those expectations.
Question: What drives the Wynn Resorts economic engine?
Answer: Total yield management of customer spend across all gaming and nongaming segments producing total revenue per available room (REVPAR) that generates significant returns on invested capital. This is a result of the principles espoused above.
Steve Wynn contributed substantially to the resurgence of the “new” Las Vegas with his casino developments in that market. Now, in a similar manner, he is repeating that role in the recent emergence of the “new” Macau. Wynn Macau, which opened in September 2006, has helped to redefine consumer expectations in that long-standing but previously unattractive gambling center. Similar to the earlier Las Vegas and its relationship to its prime customers, the Macau market had long been rejected by affluent Hong Kong (and other urban Asian) residents who considered Macau to be too infested with prostitutes, triads, and sleazy and smoky gaming rooms. Wynn Macau is a facility that “speaks” well to the affluent and wellheeled Hong Kong and broader Asian market – people who have long been exposed to some of the world’s leading brands, and some of the best hotel and service standards in the world. Wynn created a casino resort for affluent Chinese from Hong Kong and further abroad and, in doing so, has outperformed his competitors on many key metrics.
We suggest that Wynn’s Hedgehog Concept is: The design and development of the most costly, large-scale, opulent and elegant (and therefore most sought-after) casino resort environments with a wide range of high-end amenities that target affluent gaming customers and provide exceptional service through high quality, well-trained staff.
It could be argued that Steve Wynn deviated from this concept with projects like Treasure Island and the Monte Carlo on the Las Vegas Strip in the mid-1990s. However, he appears to have returned to his Hedgehog Concept with Wynn Las Vegas, Wynn Macau, and the yetto- open Encore in Las Vegas. While there has been some criticism of Wynn Macau as being too much of a replica of Wynn Las Vegas, that is a bit like criticizing Picasso for painting just another “Picasso.” Wynn has created and defined a style of casino resort architecture, interior design and service execution that others now can only copy or attempt to emulate.
Harrah’s Entertainment is another company that over the years – initially under the founding guidance of Bill Harrah, and then with significant refinements from the company’s modern leaders, former CEO Phil Satre and current CEO and Chairman of the Board Gary Loveman – has made the leap from Good to Great, and has done so on very well-defined principles first enumerated by Bill Harrah. We can once again pose the Hedgehog Concept questions for Harrah’s.
Question: What have the leadership at Harrah’s over the years been deeply passionate about?
Answers: Consistently delivering a high quality gaming product with excellent customer service. Applying and executing fundamental marketing principles and research-based knowledge. Customer relationship management – focusing on the avid, experienced gaming customer. Developing analytical systems based on hard data, facts, and knowledge rather than conjecture, and using that knowledge and analysis to confront challenges and develop company strategy.
When the rest of the gaming world – including Steve Wynn, the MGM, Caesars, Circus Circus and Las Vegas Sands – were building lavish casino properties, especially along the Las Vegas Strip, Harrah’s was focusing its primary efforts on developing an extensive player data base, closely linked to its slot loyalty program now known as Total Rewards. The genesis of this approach can be traced back to Bill Harrah who introduced the first player loyalty program with “premium points,” introduced at his Reno and Lake Tahoe casinos in the 1960s, and his appreciation of the slot customer, who was typically given backseat to the more attractive “action player” at the tables.
The underlying philosophy that evolved at Harrah’s was that a better understanding of customer preferences and spending patterns, estimating player worth based on analytical tools, and a focus on which customers were most consistent with Harrah’s over-all yield strategy, would ultimately lead to a far more efficient use of Harrah’s physical, human and analytical resources, and allow for far more effective development of a focused customer development strategy for the organization. Harrah’s eschewed the “build it and they will come” philosophy pursued by a number of casino companies in the mid to late 1990s in Las Vegas and rather focused on investing in a deep and rich understanding of the Harrah’s casino customer. They invested millions in technology while others developed bricks and mortar. Harrah’s recognized their inability to compete on this level with their existing assets and so focused on better understanding the casino customer and their ability to market more effectively to a core customer than their competitors. Importantly, Harrah’s recognized the value that their marketing programs could drive, and through Total Rewards they developed solutions that could be deployed in new markets or rolled out to businesses that they acquired. This was the foundation that allowed Harrah’s to capture significant benefits with the company’s acquisitions in the early 2000s, and especially that of Caesars in 2005.
Though Wall Street analysts penalized Harrah’s in the mid to late 1990s due to their lack of any significant presence on the booming Las Vegas Strip, the soundness of their approach has become increasingly apparent over the years. Between 1993 (when Harrah’s was known as the Promus Companies) and 2006, Harrah’s revenues climbed from $1.2 billion to $9.7 billion, net income increased from $86 million to $536 million, and market capitalization went from $3.3 billion at the end of 1993 to about $16 billion in 2007 at the time of their announced acquisition in a private equity buy-out. Harrah’s adjusted share price in 1993 was as low as $7; in early 2007, it was around $85 per share.
Harrah’s has exploited superior knowledge about its customers derived through its extensive player tracking systems and data mining capabilities to create a hub-and-spoke system of casinos, with the hubs being in destinations where tourism demand is greatest, such as Las Vegas, New Orleans and Lake Tahoe, and the spokes reaching out to casino markets that are essentially frequented by local or regional customers, such as Joliet, Kansas City, Chester (Pennsylvania) and Tunica. Harrah’s had early on committed to a geographically diverse strategy, after having discovered that players who prefer to play in multiple markets are also high value customers who should be targeted.
The multi-property propensity of desired customers is enhanced by the company’s loyalty programs. Players’ accumulated Total Rewards benefits are interchangeable among all of the Harrah’s properties; therefore loyal customers from a locally or regionally oriented market can turn their rewards into a gambling vacation in the more exotic environs of a popular tourism destination.
Question: What is it that Harrah’s can do better than anyone else in the world?
Answers: Working with technology suppliers to develop gaming loyalty and analytical systems that address a massive and geographically distributed customer base. Utilizing and applying decision science tools to market to their avid, experienced multi-market gaming customers and to quickly identify others who may fit that category. Acquiring smaller gaming companies and integrating their player lists and multiple brands into the Harrah’s loyalty programs.
Harrah’s has arguably the best distribution structure in the casino industry, with 38 properties (as of June 2006) operating in 17 jurisdictions world-wide, but with main emphasis (so far) within the United States. Early on, the company positioned themselves to be the “McDonald’s” of the casino industry, with a consistency of product offering and explicit development of the primary brand. Over the years, primarily through acquisitions and then adaptation of the newly acquired casinos into the Harrah’s fold, they broadened their stable of casino brands and worked at market segmentation and product differentiation among their targeted client base. Initially, they worked with the Harrah’s brand (for enthusiastic, experienced gaming customers), the Rio brand (for younger adventurous professionals), and the Showboat brand (for older slot-oriented customers.) With later acquisitions, they ended up with various other brands, the most important of which are probably Caesars, Horseshoe, and the World Series of Poker. (Their other brands – such as Flamingo, Bally’s, and Grand – may eventually be put up for sale.) As with General Motors in the mid-20th century, Harrah’s are now in a position to offer a broad mix of product at different price/quality/theme points, thereby capturing more significant market share of desirable core customers in the longer term.
Economies of scale and product differentiation have been by-products of the strategies that Harrah’s has fleshed out in pursuit of their Hedgehog Concept. This has allowed them to leverage their brands in a number of non-traditional ways in the context of the casino industry, and then apply marketing efficiencies against their customers’ preferences in ways that competitors cannot match. Their sheer size has also given them significant buyer’s power with important vendors such as IGT, food services wholesalers, media companies and travel partners, as well as with some of the cross-branding ventures they have pursued, as with NASCAR. Such relationships are still mutually beneficial, but more of the benefits gravitate to Harrah’s because of their improved negotiating position.
Question: What drives the Harrah’s economic engine?
Answers: Same store sales growth as a metric to gauge individual property performance. The percentage of the gambling budget from their target of avid, experienced, enthusiastic casino patrons.
Harrah’s is perhaps the most “scientific” casino company in the world today. This might be partly influenced by the fact that Gary Loveman used to be a Professor of Marketing at the Harvard Business School, specializing in strategic marketing and large database management. They have become well known as a company with many “propeller-heads’ in the back office: geeks and nerds (as they used to be called) who now are using decision science to outperform the competition. In an industry known for machismo, brashness, risk taking, and “over-thetop” posturing, Harrah’s came onto the scene as the kid with thick glasses, a pocket protector and a calculator, who was soon outperforming their bigger, stronger and more attractive competitors.
A good illustration is Harrah’s emphasis on capturing a greater percentage of the gambling budget of existing customers by persuading them to be “less promiscuous” and more faithful to Harrah’s, rather than “playing around” with other casinos. In the late 1990s they publicly stated they felt there was greater value in gaining a greater proportion of gambling spend from existing customers than in cultivating new customers. By making it less attractive for their customers to gamble in competitors’ casinos than with Harrah’s, they have pursued this objective relentlessly. Much of their recent success is arguably attributable to successfully expanding this one metric. Harrah’s has also established a well-defined set of incentives for their employees and managers tied to other key metrics such as Service Scores and Employee Engagement Scores, all of which closely correlate with Same Store Sales Growth. When well-defined targets are met or exceeded, bonus payments are made to affected employees or responsible managers. Again, this is an exercise strongly influenced by objective measures and quantitative objectives.
So what is Harrah’s Hedgehog Concept? We suggest it is: The development and utilization of decision science tools to effectively understand and respond to the needs and wants of the company’s target customer – the avid, experienced user of casino gaming for personal entertainment. As with Steve Wynn and Wynn Resorts, Harrah’s has bred imitators in the gaming industry such as Ameristar and Station Casinos. Interestingly, Station has recently also taken a chapter from the Steve Wynn playbook with their recent casino openings of Green Valley Ranch and Red Rock in the Las Vegas locals market.
Collins in GOOD TO GREAT identifies other characteristics of Good to Great companies. While Wynn Resorts and Harrah’s may not meet all the criteria that would define them as “great,” they have established clearly defined strategies that, from external observation, can be readily identified. Customers know what to expect from Steve Wynn when they enter a Wynn property or see a Wynn design. Likewise Harrah’s is entirely committed to Total Rewards and the returns it can yield when properly managed. While more of Harrah’s strategy is “under the hood” than with Wynn, it is nevertheless a strategy which the company openly communicates, especially to the financial community. Total Rewards has become the industry benchmark for Customer Relationship Management, while Wynn’s designs are often considered the benchmark for casino architecture – amongst the casino-going public if not the entire architectural community. The Bellagio, for example, was recently ranked 22nd on the American Institute of Architecture’s list of America’s favorite works of architecture, the only casino to be so included in the top 150.
It can also be noted that both Steve Wynn and the current Harrah’s organization were very much influenced by William Harrah, the somewhat eccentric but widely admired founder of Harrah’s. Bill Harrah’s original Hedgehog Concepts had been based around cleanliness within the casino, attentiveness to creating a positive experience for the customers, and being respectful of the company’s employees. (For an excellent summary of Harrah’s management philosophy, see EVERY LIGHT WAS ON: BILL HARRAH AND HIS CLUBS REMEMBERED, University of Nevada Oral History Program, 1999.) When Steve Wynn opened the Golden Nugget in Atlantic City in 1982, he paid homage to both Bill Harrah and Walt Disney as his creative influences.
The value of a Hedgehog Concept is perhaps most obvious when we examine companies that did not seem to have one, and which drifted into difficulty or oblivion as a result of not having strong guiding principles. Bally’s in the late 1980s was a good illustration of such a gaming company, as was Caesars when it was owned by ITT Sheraton and then later by Starwoods. The Trump casinos in Atlantic City might provide a similar example. If a company is not organized around a compelling Hedgehog Concept that permeates the organization, then Jim Collins would suggest it is not “built to last,” and indeed, it may not last.
Establishing a Hedgehog Concept is useful at any level, whether personally or for an entire company. It may also be useful in going from Average to Good, or from Start-up to Achieving Initial Target Performance Levels. In its simplest form, it is about finding a positioning that the individual or the company can enjoy, a niche that can be exploited, that the individual or the company can be good at, and a reason – economic or otherwise – to do so.
As this review suggests, other gaming companies would be well advised to take heed of lessons learned from Jim Collins, Wynn Resorts, Harrah’s Entertainment, and the hedgehog.
