What Made Harrah's An Innovation Leader

by Peter Klugsberger

1. Introduction
Apart of the hourly erupting volcanoes, sinking Pirate ships and replicas of the Eiffel Tower, one might argue that the only thing the casino companies have invented over time is an especially effective way of parting willing consumers from their cash. However, as in many other industries that entered into a mature life-cycle stage, customers’ expectations evolved notably over recent years and people’s demands for an improved customer service experience forced many of those gambling empires to rethink their strategies and adapt to the rapidly changing business environment. This report sets out to look at one of these incumbents, Harrahs Entertainment (HET), with a particular focus on how it transformed itself into one of the most innovative companies in the gaming industry.
2. Industry background
The core product or revenue generators of a casino, the table games and slot machines, are in essence commodities which are easily replicated by any new entrant or competitor due to their availability in the market place. For that reason, one of the few areas of potential differentiation for a casino is in providing a unique customer experience in form of either building a ‘must-see’ property or through increased customer service levels.

Over the last two decades the North American market was dominated by four major gaming empires. Three of those, namely MGM Grand, Caesars, and the Mandalay Group were following the ‘must see’ property strategy. Contrary to those aforementioned players, Harrahs decided that the huge capital costs of developing these ‘glorious’ properties did not prove a viable alternative in achieving long-term market growth – instead they chose to develop a core competence around customer loyalty.

The gaming industry has never been known, until recently, for pushing established boundaries or to be especially innovative. Many of the advances in the design and development of new products and services were primarily achieved by means of incremental innovation rather than by endeavouring to break out of the mould.

3. About the company
Harrahs was founded in May 1937 in Nevada by William Fisk Harrah, a 26-year-old entrepreneur. By 2002, HET grew to be a major player in the gaming industry consisting of 26 casinos in 17 different cities.

Phil Satre, who became CEO in 1984, focused his initial strategy around people. Under his reign, Harrahs developed a rewards program based on tracking cards (akin to a frequent flyer program) at each of their properties. However, this program was run independently and therefore took totally different forms at each property.

By the mid 1990s, HET felt the competitive pressures and attributed sizeable losses in market share to the ‘must-see’ properties. HET was at the crossroads in deciding if it wanted to imitate this approach or discover new ways of competing – one thing was clear, something had to change. In an attempt to avoid the enormous development costs, Harrahs decided against imitating its competitors approach and rather focus on becoming market leader in building and maintaining close customer relationships.

However, Phil Satre understood that to succeed in his attempt to turn the company around, he needed to adopt a more radical new business system and at the same time discard the present functional approach that held the company and its people virtually captive in the past.

For that matter, I am going to look closer at each of the critical areas that were essential in the transformation process from pursuing a ‘follow-the-leader strategy’ to becoming an innovation leader in the gaming industry.

4. Leadership
A year after analysts questioned the company's viability, Phil Satre understood that he needed a person that not only had a clear vision but also possessed the necessary competence and determination for turning the company’s fortunes around. Getting to the root causes of HET’s poor performance required a special kind of person that could shake up current organisational structures and break the somewhat inward-looking mentality of HET’s people.

The CEO also recognised that his problems could not be solved by merely creating another marketing position – for the transformation process to have any kind of credibility they had to bring in somebody as the COO. This was a critical success factor since for a person to generate changes in the operating business, he/she needs to be equipped with the authority to say “this is the way we are going to engage our customers”. The CEO settled on a choice so unconventional that he didn't tell his board about it until it was a done deal. The surprising choice fell on Gary Loveman, a Harvard Professor that specialised in relationship-marketing and who contacted Satre with an unsolicited proposal to expand HET’s business activities. Given the risks involved, I believe that this was a bold but necessary move to take on an outsider – a person that could see the problems of the company without having any mental preconception such as ‘I am the industry expert and I know what needs to be fixed’. One of the major advantages the new COO had, was the fact that he did not have to unlearn established mental models or felt that he had to follow unwritten rules - he could allow himself to approach the company without limiting his imagination to what were the necessary steps to achieve market growth.

Initially, most of the HET employees were reluctant to trust their new CEO, in particular since they did not feel that the Harvard Professor had what it takes to succeed in the gaming business. They were not entirely wrong in their first assessment – until then, Loveman had managed only one secretary and a research assistant and now was in charge of 26 casinos, 15,000 hotel rooms, more than 100 restaurants, and 40,000 employees.

For a new and innovative environment to emerge, Loveman had first to dismantle employee’s past mental attitudes and patterns of behaviour that were not aligned with his vision of wanting to create a national brand that truly inspired customer loyalty. For example, one of his first important decisions as COO was to replace the existing marketing people. He took out practically the entire corporate marketing department since he figured from the onset that they were never going to support his change program and take it where it needed to go. Instead of attempting to change the incumbent people’s attitude, he recognised it was highly unlikely that he would win this battle. Consequently, for his vision to become reality he imaged a different kind of employee that they had right now - one that had the horsepower to do this kind of work. He searched for the best and the brightest and contracted several customer relationship ‘rocket scientists’ from outside the gaming industry. This was an interesting and valid choice, in particular since it provided the company with new people with different talents and a fresh outlook. Getting people to see a problem with from different angle was a good way of breaking the inherent ‘groupthink’ mentality. Suddenly, people were focused on customers’ wants & needs instead of following the daily ‘business as usual’ routine.

Another important characteristic of Loveman’s leadership style that was conducive to innovation was to involve himself in initiatives that he felt were instrumental to accomplishing his vision. For example, he chaired the newly created marketing council which brought together field-marketing people as well as outside agencies, PR agencies, and senior technology persons. The creation of this cross-functional heavy-weight team was vital in communicating to employees that coming up with a new marketing concept was a top-priority for the new management. In addition, the composition of these teams was deemed extremely significant since much of marketing was running through technology systems that had to be managed by Information Technology (IT). Members of th Download file - SI050620_PKlugsberger_Harrahs.pdf (44k)

Date Posted: 03-May-2006

PETER KLUGSBERGER worked in executive roles with one of the largest international casino operators. His assignments included projects in countries such as Australia, Denmark, Switzerland, and Venezuela. He is currently working as Director of Table Games in a Canadian casino operation. Peter recently completed a Global Executive MBA degree with the IESE Business School in Barcelona. He can be contacted at pklugs@yahoo.com.