9:39 4 X 201803201525392.inte. . . . Strategy Session 6 Forces Affecting Competitive Strategy OBJECTIVE This session will help identify the forces of competition and determine what effects these forces have on a competitor's ability to earn high profits. The exercise features a profile of the casino gambling industry that lets you assess these forces. n industry is defined as the group of competitors that produce similar products or services that satisfy the same basic consumer need. For Most of us never recognize example, the lodging industry consists of hotels and motels that compete opportunity until it goes to work in with one another to provide accommodation for travelers away from home. The automobile industry consists of competitors that manufacture and market our competitor's business. cars, trucks, and other kinds of vehicles to transport people, property, and - P. L. Anda services. Managers must understand the nature of competition within their industry so that they can identify opportunities and threats facing the company. From this analysis, they judge the potential in the industry for above-normal profitability and ultimately determine the best strategy for the firm to pursue to either offset or influence competitive forces. The model for analyzing an industry consists of five forces of competition developed by Michael Porter: 1. Industry Competition-Rivalry Among Existing Firms. When companies in the same industry compete, they often use tactics such as price competition, new product introduction, and advertising slogans and campaigns. The intensity of the competition depends on factors such as the number of competitors, rate of industry growth, amount of fixed costs, product or service characteristics, exit barriers, capacity levels, and the diversity of rivals. 2. Threat of New Entrants. New entrants or companies that are not currently part of the competitive group may be looking for an opportunity to enter the industry. How much of a threat they pose depends on the barriers to entry present and the reaction from existing competitors. Barriers to entry include economies of scale, product differentiation, capital requirements, cost disadvantages independent of size, access to distribution channels, and government policy. 3. Bargaining Power of Suppliers. Suppliers to an industry are those who supply materials and services required by firms in the industry. Suppliers can affect the profitability of an industry if they are able to raise prices or reduce the quality of purchased goods or services. Forces affecting supplier bargaining power include the number of available suppliers, the uniqueness of a supplier's product or service, whether the industry competitor has the potential of integrating backward to produce the supplier's product, the cost to change suppliers, and whether the industry is an important customer of the supplier. ining Power of Buyers. Buyers at Helpful Unhelpful also include wholesalers ers affect an industry Ask Expert Tutors services, or play competitor commercial buyers have bargaining p when9:39 1 Intensity of Competition in the Casino Gambling Industry Please read the following 2 page write-up titled "Strategy Session 6: Forces Affecting Competitive Strategy". After that read the case on "Casino Gambling Industry" (4 pages, attached in this document), and submit to me a 3 page written case analysis of the case questions (see below) in class. (See class schedule for date due and also for the expectations for case analysis write-ups in the Syllabus). 1. Who are the buyers in the Casino Gambling Industry? What do they buy? What do you think about the bargaining power of these buyers? High/Medium/Low? (Choose one) 2. Who are the suppliers in the Casino Gambling Industry? What do they supply? What do you think about the bargaining power of these suppliers? High/Medium/Low? (Choose one) 3. Which new firms might want to enter the Casino Gambling Industry? What are the barriers to entry into this industry? What is the level of threat of new entrants? High/Medium/Low? (Choose one) 4. Identify some substitutes for the Casino Gambling Industry? What do they substitute? What do you think about the level of threat they pose to the sales and profits of bargaining power of these buyers? High/Medium/Low? (Choose one) 5. Define the casino gambling industry. Who are the main players (or existing firms)? What is the level of intensity of competition - High/Medium/Low? (Choose one) Strategy Session 6 Forces Affecting Competitive StrategyCon 9:39 1 Among Existing Firms. When companies in the same com use tactics such as price competition, new product tion, and a g slogans and campaigns. The intensity of the competition on factors such as the number of competitors, rate of industry growth, of fixed costs, product or service characteristics, exit barriers, capacity levels, diversity of New X 201803201525392.inte. . . . petitive g isting competitors. Barriers to entry Include econom tiation, capital requirements, cost disadvantages independent of size, access ibution channels, and government policy. ing Power of Suppliers. Suppliers to an industry are those who supply Is and services required by firms in the industry. Suppliers can affect the bility of an industry if they are able to raise prices or reduce the quality of sed goods or services. Forces affecting supplier bargaining power include the of available suppliers, the uniqueness of a supplier's product or service, the industry competitor has the potential of integrating backward to produce plier's product, the cost to change suppliers, and whether the industry is an ant customer of the supplier. 37 Session 6: Forces Affecting Competitive Strategy 4. Bargaining Power of Buyers. Buyers are usually consumers of the product or service, but they can also include wholesalers and retailers who bring the product to the consumer. Buyers affect an industry by being able to force down prices, bargain for more services, or play competitors against each other. Typically, industrial or commercial buyers have bargaining power when they purchase in large volume or when the costs of switching from one industry player to another are low. Consumer buyers tend to be more price-sensitive when they purchase undifferentiated products or when the products are expensive relative to their income. 5. Threat of Substitute Products and Services. Substitute products are those provided by competitors in a different industry but come close to satisfying the same consumer need. For example, renting videos or DVDs is a substitute for going to the movies, wine is a substitute for beer, and so on. The threat of substitutes exists because their existence places a ceiling on prices the industry can charge. When prices get too high, consumers will switch to the substitute, unless the industry upgrades or differentiates its product, thus making the substitute less appealing. Helpful Unhelpful Ask Expert Tutorsin a compromised position. Government now has a 9:40 4 izens to lose money. ess these concerns much like the alcohol companies ng. Most casinos post phone numbers for Gamblers at their cashier windows and provide literature with information on problem X 201803201525392.inte.. . . . Session 6: Forces Affecting Competitive Strategy The casino industry faced its steepest slump in 2008 due to the recessionary economy and the tough financing environment. The housing market decline and concerns about unemployment affected consumer discretionary income. A reliance on revenue from conferences and conventions also increased the industry's sensitivity to the economy. Native American Casinos The Native American Gaming Regulatory Act of 1988 gave Native American tribes the right to negotiate for the development of a gaming facility. Based on data from the federal regulatory agency known as the National Indian Gaming Commission, more than 200 of approximately $50 Native American tribes in the United States own and/or operate casinos in the nation. The highest volume projects are on Mohegan and Mashantucket Pequot land in Connecticut. The growth of Native American-owned gaming creates opportunities for other casino companies to provide management services. Although outsiders cannot own Native American gambling facilities, they are allowed to manage properties under contract. Variation in Casinos In the United States, individual states have the power to grant new casino gambling licenses and to regulate the industry. Because of the diverse state regulations, there is considerable variation in the appearance, scope, and location of new casinos. In some states, projects have developed in stages. A boat with gambling can be opened quickly. As of year-end 2007, about 81 water-based casino projects were open in lowa, Illinois, Mississippi, Louisiana, Missouri, and Indiana. After Hurricane Katrina, legislation was passed in Mississippi allowing casinos to be placed up to 800 feet inland from a high-point tide. If the riverboat operation is favorable and if financing is available, a company can enlarge its gambling space and add related facilities, such as hotel rooms. Finding ways to differentiate casinos is an important competitive advantage, particularly since casino floors with slot machines and table games look alike. The Las Vegas Strip uses special themes and attractions to create different settings, such as ancient Egypt, a pirate ship, and a castle. Companies such as Harrah's Entertainment are developing strong brand recognition among customers. Proximity to interstate highways and major population centers is an advantage for new gaming facilities. Also, some companies target specific groups of customers. Boyd Gaming targets residents of Hawaii and operates six weekly charter flights from Honolulu to Las Vegas. Abandoned Projects Up until February 2008, low interest rates, high real estate values, and solid cash flow attracted many private equity deals in the gambling industry. However, the credit crunch resulted in Harrah's cancellation of a $2.1 billion resort in the Bahamas. In Las Vegas, foreclosure proceedings began on the Cosmopolitan. This project had estimated construction costs of $2 billion, and ended up with costs of $3.9 billion. Developments that need additional funding, such as the Las Vegas Sands project in Singapore, may also be put on hold. Internet Gambling The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) was meant to force banks to block payments to gambling Web sites, and it required that the Federal Reserve and the Treasury Department issue regulations on identifying and blocking Internet gambling transactions. As of April 2008, the director of the Division of Reserve Bank Operations and Payment Systems noted that in recent years, card issuers and money transmitting businesses initiated steps that make funding for gambling on the Internet more difficult. However, some banks have concerns about their role in determining which transactions should be blocked under the law. The American Banking Association has complained that the law pushes banks to the position of policing illegal activities. The European Union is launching an investigation of whether the law violates international trade rules. The EU trade commissioner suggested that the U.S. could be selectively enforcing the law against EU companies. Although Financial Services Helpful Unhelpful Ask Expert Tutors gambling. Underageform of regulation is taxation. It may be less than 10%, while in other markets 9:39 4 X 201803201525392.inte.. . . . Part II: Designing Strategy Chairman Barney Frank proposed Internet Gambling HR 576, which would delay the implementation of the law until a definition of unlawful internet gambling was developed, the House Financial Services Committee rejected the bill on June 25, 2008. Thus, despite the issues associated with implementing UIGEA, the law will not be overturned. Industry Structure The U.S. casino gambling industry has become more consolidated over time due to acquisitions and internal growth. The largest company, ranked by casino winnings, is Harrah's Entertainment, Inc. This company was taken private in 2007. China, however, is changing the structure of the industry. One of the world's hottest gambling markets is Macau, the only part of China where gambling is legal. The Macau casinos generated $3.71 billion in gambling revenue during the first three months of 2008, which is more than their counterparts in Las Vegas and Atlantic City combined. As a result, international properties, such as those in Macau, are changing the structure of the U.S. industry. This is similar to the situation that occurred with the automobile industry. Gambling promoters for Galaxy Entertainment Group, one of six licensed casino companies in Macau, have become very aggressive in increasing the supply of VIP customers from mainland China. These mega-junkets are causing concern for casino operators such as Wynn Resorts, MGM Mirage, and Las Vegas Sands whose stock prices have declined in part because of increasing challenges they face doing business in Macau. Suppliers International Game Technology (IGT) designs, manufactures, and markets computerized gaming equipment, systems, and services. The company is the largest supplier of slot machines and is headquartered in Reno, Nevada; and the slot machine industry is highly concentrated. IGT business expansion has occurred through acquisitions and the development of strategic alliances. For example, in 2005 IGT acquired a Canadian distributor, a provider of Internet gaming technology, content, and services, and a provider of consulting services and technology in the gaming and hospitality market. In 2007, strategic agreements were established in the China lottery market. Although casino revenues are expected to decline, gaming machine sales will increase due to a shift to server-based slot machines. This will result in demand for replacement equipment at casinos. Transportation For many of the larger gambling properties, customers arrive by airline, especially business and vacation travelers. Although fares for air travel rose substantially in 2007, airlines have offered fare sales. Automobiles are the primary means by which customers travel to casinos. The smaller, regional, and Native American gambling markets are negatively affected by the gasoline prices. Activists Although many residents of communities where commercial casinos are located support casino gambling, many other groups do not. Various churches, ad hoc citizens' groups, and national organizations such as the National Coalition Against Legalized Gambling protest legalized gambling because it comes with a high social cost in the form of addiction. They argue that youth are drawn into compulsive gambling habits at double the rate of adults, and that gambling has hidden negative economic impacts, such as diverting revenue that would be spent at local businesses. This, in turn, results in increased costs to the state from bankruptcies, addiction treatment centers, and the penal system. These organizations also point to the fact that when state governments depend on casinos for tax revenue, it puts the government in a compromised position. Government now has a vested interest in encouraging its citizens to lose money. Casinos have attempted to address these concerns much like the alcohol companies that encourage responsible drinking. Most casinos post phone numbers for Gamblers Anonymous at their cashier windows and provide literature with information on problem 40 Helpful Unhelpful try faced its steepest s Ask Expert Tutors lancing environment. The unemployment affected consumer discret conteren9:39 4 X 201803201525392.inte... . . . Exercise Intensity of Competition in the Casino Gambling Industry INSTRUCTIONS Read the description of the casino gambling industry below. Respond to the questions that follow in order to evaluate the intensity of the forces and their impact on the profitability that can be attained in the industry. The Casino Gambling Industry in the United States: Expansion and Competition ompared to industries such as the traditional hotel business, the gambling industry is not mature. Up until 1988, legal casinos operated in only New Jersey (Atlantic City) and Nevada. During the 1990s, gambling revenues increased largely as a result of geographical expansion into the Midwest and the South and to new investment in Las Vegas. Today more than 20 states allow gambling. In fact, much of the industry's expansion is due to casinos being allowed on Native American land in various states. The casino gambling industry includes more than 450 legal casinos in the United States that offer customers the opportunity to play coin-fed machines and table games. This industry group does not include facilities that focus on bingo, or other facilities such as racetracks in Delaware and Iowa, where casino activity is limited to coin-fed machines. Revenues, which are the amount of money wagered less the winnings paid to players, totaled approximately $58.7 billion in 2007. Table 6.1 shows a breakdown of facilities and revenues by location. TABLE 6.1 CASINO GAMBLING FACILITIES AND REVENUES BY STATE, 2007 Location Number of Facilities Revenues Nevada (statewide) 274 casinos in addition to smaller facilities, such as $12.8 billion taverns and retail stores, with video poker machines. Atlantic City, NJ 11 high-volume casinos $4.9 billion Mississippi, Indiana, Illinois, Louisiana, 83 water casino projects (some consisting of more than $11.8 billion Missouri, and lowa waterways one casino boat) Detroit, MI 3 casinos New Orleans, LA 1 land-based casino $2.7 billion Colorado; Deadwood, SD 50 limited stakes casinos Note: The remainder of industry revenues is from casinos on Native American land. Although more than 20 states allow gambling, the industry is highly regulated, and the introduction of casino activity requires licenses or agreements with state authorities. A significant form of regulation is taxation. In some markets, the state or local tax on casino winnings may be less than 10%, while in other markets it exceeds 20%. Strategy net Gambling HR $76 Helpful Unhelpful in of unlawful internet jected the bill on June Ask Expert Tutors ciated with it UIGEA, the law will not Industry Structure