Sunday, July 17, 2011

How Culture Creates Competitive Advantage

A Case Study on the creation (and destruction) of competitive advantage in the Las Vegas Gaming Industry

The original pre-expansion HRH
Think back to 1995.... It was the year people just started to become aware of the internet, a huge stock market bubble was in its early stage, cell phones were starting to become less than the size of a brick, and OJ was found not guilty.... And 1995 was also the year that the Hard Rock Hotel (HRH) first opened its doors, and I was fortunate enough to be a part of the opening staff. It was a VERY different place back then – a very special place, a relatively small place, and an excellent example of the rise and fall of a unique business competitive advantage.

How an entrepreneur created competitive advantage, used it to exploit a market opportunity, and made a fortune in the process:

In the early 1990's, entrepreneur Peter Morton saw an unexploited opportunity in the Vegas market. What exactly was this unexploited opportunity? Well, it was at the intersection of a few trends – the first was a decline in the level of service, in general, throughout the Vegas market. The second trend was the growing wealth (at that time) of Generation X.  This group of consumers was, totally underserved and ignored by market players in the Las Vegas hotel/casino/entertainment industry.  The third trend was financial –  the US economy was still on the front side of its credit bubble curves (a financial bubble that would eventually become bigger than what preceeded the great depression of the 1930's).  And fourth, attitudinal trends were very conducive to the success of this kind of a venture: in many ways the late 90's were sort of like a combination of the roaring 20's and the 60's. People had good reasons to party, and the money to do so was readily available....

There are a few skills that, at a high level, enable entrepreneurs like Peter Morton to seize opportunity: 1) The ability to recognize an unexploited opportunity created by trends and current market forces/market players.  2) the ability to create a competitive advantage that is aligned to and utilizes (exploits) the unexploited opportunity created by those trends. And 3) the determination, charisma, vision, and leadership to rally a large group of people to execute an effective strategy.

#1 & #2 are a function of entrepreneurial ability and a keen understanding of market trends/dynamics and consumer preferences, with #2 also a function of entrepreneurial ability, “visionary” leadership, and the ability to create a competitive advantage that is aligned to and optimized for exploiting the opportunity. #3 is a function of individual competitive advantage. Mr. Morton was also a unique leader....I recall several conversations from the early years with him – he would routinely stroll through the casino to chat with employees or hang out with staff in the employee dining room in order to get a feel for what was happening on the front lines, and keep his thumb on the pulse of the market.

Organizational Culture: The Vital Factor

On the surface, the strategy for creating competitive advantage is simple – create an organizational culture that is aggressively aligned to utilizing the unexploited opportunity that has been ignored by competing firms and creates the then unprovided value proposition that is craved by consumers. This is easier said than done. The physical aspects of the building design were relatively easy.  The most important ingredient was, of course, organizational culture.  Why? Because organizational culture is the only source of sustainable competitive advantage in highly competitive markets.  Anyone could build a hotel and make it look however they wanted, but it is the experience and feeling that people get when they interact with an organization that matters over time, and keeps them coming back. No matter how cool looking a hotel/casino is, if the service is bad and the the vibe is negative for customers-- it will struggle.... Sure, locational factors matters and branding can help overcome bad culture (in the short run), but a firm will operate far below its potential in such cases.

What is organizational culture?  I have defined it elsewhere as the “chemistry” that arises between the interactions of the individuals’ and the organizational processes that comprise the operating framework of the firm, all in light of its leadership and interactions with customers.

The birth of an organizational culture...and the (initial) HRH competitive advantage.

In my view, HRH's initial success was a function of three main variables 1)  “visionary” leadership 2) initial training, and 3) hiring the right people.

As I have previously written:

“In 1995, the Hard Rock Hotel opened its doors in Las Vegas, and the author was fortunate enough to be a part of its opening staff. Hard Rock Hotel owner & developer, Peter Morton, saw an opportunity to create a competitive advantage over other Las Vegas casinos. He would do this by creating as part of the plan an organizational culture that would, at least for the first couple of years, provide its guests with a new level of customer service.
The author dealing dice at HRH in 1995
Young & attractive employees with personality were hired, even if they had no prior casino work experience. Employees were hired based on personality, attitude, ability to learn, and of course, physical appearance. It did not take long for the Hard Rock, despite being located off the Las Vegas Strip, to gain the reputation of having the best service and most personable and attractive staff of any hotel/casino in Las Vegas.
Upper management purposely hired front line staff that would give an experience that was different from the norm. Young, hip, sexy, fun, & positive were the internal values an employee had to have to be hired at Hard Rock. It was these employee values which were aligned with Peter Morton’s vision and the overall marketing and business strategy, that were utilized in creating the organizational culture that initially served as Hard Rock’s competitive advantage.

Up to that point in time, many of the casinos had a reputation for having poor service. In general, Dealers and Pit Bosses had negative personalities. Miserable front line staff that had an attitude of entitlement were the norm. There was an unmet need in the marketplace, and Peter Morton exploited the market by purposely creating and applying an organizational culture that was optimized to exploit that unmet need. As part of pre-opening training, the front line staff at Hard Rock were instilled with Morton’s vision for organization culture. His number one value was “have fun, and make sure the guests have fun too….” Newly hired employees began to ask themselves the question “how can I apply myself to make this a fun place.” The result was a unique guest experience at each blackjack table, each restaurant, and each department as each individual employee brought forth and applied the best of what they as an individual had to offer.

When a player walked up to a table game in the casino they did not see a quiet dealer with his arms folded who didn’t want to be bothered. What they got was a smile and a “welcome to the Hard Rock” greeting. If a customer had a problem, front line staff met them head on with an attitude of empathy to solve the issue.

The design of the building, the organizational culture and employee values oozed into the atmosphere of the place, and it quickly became the coolest place to be. That atmosphere was why people chose the Hard Rock, and organizational culture is what drove the feeling in the atmosphere of the hotel.”

There was an intense initial focus on training, leadership, and setting the organizational culture, and the effects were quickly felt after opening in March, 2005 as the HRH developed a very loyal clientele.  I remember one executive telling me “we could just shut down during the week and survive on our weekend business alone.”  And that was probably a good thing because the place was usually empty during the weekdays, and indeed, aiming a strategy at a narrow target market entails risks such as this (t is, of course, oftentimes ideal to get as targeted as possible in the context of direct marketing).  But of course, issues such as this can always be overcome with some creativity.

The rise and fall of a competitive advantage

But of course, nothing good lasts too long – without discipline and effort that is....  I described the decline in this way:
But Hard Rock’s competitive advantage was not to be sustained. Turnover in management and the front line staff combined with a lack of focus caused the culture and competitive advantage to suffer. New staff was not trained on the importance of sustaining the organizational culture and competitive advantage. Over time, the vision was lost. It was not long before it turned into just another casino. The Hard Rock Hotel became a shadow of its former self, and in the process lost a lot of its business glory to its competitors. Other casinos, such as George Maloof’s Palms Hotel, went on to create competitive advantages of their own and have eaten Hard Rock’s lunch. Hard Rock’s organizational culture grew weak, and this allowed its position in the marketplace to be overtaken. Despite this, Peter Morton profited handsomely from the real estate bubble and resulting increase in Las Vegas commercial property values, but one cannot help but think that the decline in Hard Rock’s competitive advantage played a role in his exit strategy….

...organizational culture is the “personality” of the organization. It is the “chemistry” that arises between the interaction of the individuals and organizational processes that comprise the operating framework of the firm, all in light of its leadership. Through circular feedback, this chemistry influences how individuals act and make decisions. Organizational culture is indeed vital to a firm’s success. It takes effort to sustain or improve organizational culture and the competitive advantage that it creates. It must be actively maintained and not left to chance.

It takes a lot of effort to properly set organizational culture in the initial stages, and it is even more difficult to maintain it over time.  I left HRH in 1999. I then returned to work there in 2001 and by then the decline was evident – employees would routinely do things that would of gotten them terminated in the initial years and the vibe was much different – the focus was no longer on providing an experience and the highest level of service to the clients.  A lack of discipline, a lack of training over time, and employee turnover eroded the culture and . The level of talent was no longer evident.  The initial strategy of preeminence, genuine empathy for guests, the highest level of service and most importantly, FUN, had eroded down to “just another casino” by the mid 2000's.

Given that organizational culture is a vital driver of competitive advantage in highly competitive markets, executives should thoroughly understand and master what organizational culture is, how to create it, how to maintain it, and how to enhance it.    

John T. Bardacino, CAIA

P.S. I recently had some flashbacks to the old days when walking through Vegas's most recent creation, The Cosmopolitan.  Cosmo, at least right now, has a nice vibe to it, and I found the staff to be outgoing.  Can they continually enhance their organizational culture over time while at the same time deal with financial pressures? Time will tell but I hope they are successful...I miss the old days.