Casino Industry Case Analysis
There is a steady growth rate in gaming revenues taking effect in the casino industy around the United States. A number of factors are tied into the increase including new entrants to the casino industry and rival casino expansions. Through aspects of Porter’s Five Forces Model of Industry Competion: Rivalry among existing firms, the threat of new entrants, and the threat of substitues, this case analysis addresses key problems the casio industry is facing and implements stratiges they may use to tackles thoses issues. In addition, SWOT analysis (Strengths, Weaknesses, Opportunites, and Threats) will be used to facilitate the discussion.
Through the Porters Five Forces Model of Competition, were identified three main problems: the threat of new entrants, the threat of new substitutes, and intensity of rivalry among competitors in the casino industry. The threat of new entrants refers to barriers that the competitive enviornment is placing on the potential newcomers. There are six sources of entry barriers: economies of scale, product differention, capital requirements, switching costs, access to distribution channels, and cost disadvantages independent of scale.
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The threat of substitutes refers to products and services that satisfy the customer in a manner that they provide a higher level of service and better economic competitiveness. Rivalry among existing firms refers to the fueds that takes place among competition in an industry which include the likes of price competition and advertising battles. The Strengths and Weaknesses of SWOT refer to the internal conditions of the firm-where your firm excels (strengths) and where it may be lacking relative to competitors (weaknesses).
Opportunities and Threats are enviornmental conditions external to the firm. These could be factors either in the general environment or in the competive enviornment. The product differentiation is forcing casino industries to expand on existing resorts or build new more expensive and extravagant resorts in order to compete with it rivals. MGM Mirage is building the “City Center”, a $7 billion resort in Las Vegas. It will feature over the top qualities that will top all previous privately financed projects in American history.
Byoyd Gaming is developing the “Echelon Place” which is the most expensive single casino at $4. 4 billion in Las Vegas. In addition, Las Vegas Sands and the Palazzo based in Las Vegas are making expensive additions to their properties. Along with the increasing revenues in Las Vegas, waterbourne casinos have produced the greatest growth producing casinos at various rivers and lakes. They have generated $11 billion in revenue in 2006. Furthermore, The Borgata Hotel Casino in Atlantic City is in the process of a $2 billion renovation trying to make it a better place to visit.
Additionally, casino hotels in Atlantic City are making rennovations to help bring in more customers such as Caesars, Trump Plaza, and Hilton. Finally, Native American casinos are increases across the U. S. and are becoming a powerful threat in the industry. Competition among existing firms is one of the key problems facing the casino industry. Based on 2006 revenue and income from Casino Journal’s National Gaming Summary, the top 5 leading casino industries in revenue were Native American casinos, Nevado casinos, Atlantic City casinos, riverboat casinos, and Western town casinos. See graph below for figures). There is a large number of competition making the rivalry more intense. The top two revenue leaders Native Amercian casinos and Nevada casino are leaders for a reason. The general enviornment has influenced Native America casinos to become number one in revenue. With the passing of the Indian Gaming and Recreation Act of 1988, Native Americans now have authourization to offer gaming on tribal lands as a way to encourage their self-sufficiency.
In addition, Native American casinos are exempt from federal regulations and are not required to pay any taxes on their revenues. They only have to pay a percentage of their winnings to the state in which they are located utilizing the political and legal segment of the general enviornment. Adding to Native American casino fortunes, their casinos are likely to increase over the next few years. It is noted that several states are reaching agreements to allow the introduction or expansion of Native American casinos because of the additional revenues they can provide.
This increases the Native American casinos opportunities and consitutes a high barrier for new entrants. The major source for this entry barrier is the cost disadvantage independent of scale regarding the favorable government polices vis -a -vis the Indian Gaming and Recration Act of 1988. Nevada casinos are the second leaders in revenue. The strengths that they have generated are the availablity of more hotel rooms, fine dinning, excellent entertainment, shopping, mergers and acquisitions, customer loyalty, and product differentiation among its rivals.
With its many strengths, Nevada casinos represent a high barrier for new entrants as well mainly due to product differentiation and economies of scale. Nevada casios use differentiation on the basis of special themes that characterizes their casinos, such as a medieval castle, a pirate ship, or a movie studio. Nevado casinos also rely on economies of scale as many of the larger casinos are expanding by buiding on additional rooms to bring in more customers. Eventhough Nevada casino has many strengths, it also has a weaknesses.
Two weaknesses they need to address are their distance away from gamblers and rising gas prices. In order to increase competition and revenues, the lagging revenue leaders Atlantic City casinos, riverboat casinos, and Western town casinos need to take advantage of Nevada casinos major weaknesses. Some gamblers do not want to travel as far as Las Vegas to get the casino experience. Along with this fact, gas prices are steadly rising limiting long travels for vacation. Both facts increase the likelyhood that gamblers will seek the casino experience closer to their residential areas.
Atlantic City casinos, riverboats, and Western town casinos can take advantage of this by utilizing its own strengths which for the Atlantic City casinos is its closeness to various northeastern cities. Substitues are the second major factor identified in the casino industry competitive environment analysis. Race track betting, gaming machines at race tracks, and internet gambling are the substitutes that are placing a threat to the casino industry. The emergence of internet technology is a factor of the general enviornment that has a direct effect on the competitive enviornment in particular the rise of internet gambling.
Hence, we conclude that this limits the returns from hotel accomodations, dining and enterntainment, which places a ceiling on the prices that the casinos can charge. Therefore, the differentiation of the product is high and presents a threat to the casino industry by making the revenues and profits tighter. Finally, with internet gambling, one doesn’t need to be in a specific location in order to participate in twenty – four hour gambling. This fact also limits the profits of the casino industry.
One last point to mention is the entry cost to making an internet site would be very cheap, however illegal in the U. S. Last but not least in importance, the intensity of rivarly among competittion is the third main factor that influences the competitive enviornment in the casino industry. The top five leading casinos in 2006 based on income were MGM Mirage, Wynn Resorts, Harrah’s Entertainment, Las Vegas Sands, Penn National Gaming. (See graph below for figures). The numerous and equally balanced competitors in the casino industry increase the rivalry among them and influence their income.
Also the rivalry is enhanced by the slow industry growth since the casinos are fighting for the same market share and seek to expand sales. Due to the above mentioned factors the customer`s choice is based on the price and service competition, that is a reason for the lack of differentiation in the offered prices and services. As a result, the incomes are relatively close. The number of casinos on riverboats is rising gradually which creates heavy competition among them. In regards to this, there is a lack of product differentiation and most of them are trying to increase their income by offering unique products and services.
However, due to their similar income/revenues most of them are able to retaliate with compairable products and services thus creating instability in the industry market share. Casinos are having slow industry growth by trying to maintain their business by providing complementary rooms, foods and beverages, shows, and other services in order to expand their sales. There is high competition in this market share since these rewards are tied to the product differentiation which forces the competitors to spend heavily in order to overcome the customer’s loyalties.
In conclusion, rivalry and substitutes are the main factors that are driving competition amongst firms in the casino industry. In order to compete with its rivals, casinos are forced to spend billions of dollars in order to survive and expand. It is concluded that there is a high barrier for entrants due to high cost in order to overcome customer loyalties. In additon, legal barriers connect to the status of the land which is favorable for the Native American casinos and create a barrier for the new entrants to compete.
Intense rivalry exists due to product differentiation and slow industry growth. Substitues are increasing throughtout the market as well. The technology factor is becoming a threat to the industy. It influences the competitive enviornment and lowers the income of casinos. In general, the casino industry is very competitive with high entry barriers. The exit barriers are also high. It will be difficult for a casino to exit the market because of this therefore we wouldn’t suggest investing in one.