Report using the five forces model of Ceasars Entertainment.

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As the CEO of Ceasars Entertainment, much of the information in this report on the casino and gaming industry will sound familiar to you. To expound upon traditional industry data this report utilizes the five forces model developed by Michael Porter along with a general environmental trend analysis. Porter’s renowned forces include threat of entry, buyer power, supplier power, threat of substitutes, and the intensity of rivalry in the industry. When coupled with an analysis of the changing nature of the casino industry these forces make for powerful tools to evaluate the overall attractiveness of the casino industry.

The first aspect of the Five Forces Model is threat of entry.  Due to the nature of the industry, there are very low switching costs.  In the United States legalized gambling is restricted to certain areas so all competitors are bound to the same geographic boundaries.  This gives buyers a tremendous amount of flexibility.  Furthermore, differentiation of one’s product has a relatively short life span.  This is illustrated by the expectation of above average returns on a new casino or remodeled area of the strip in Las Vegas for only one to two years.  So companies are constantly forced to open new locations, remodel, or reinvent in order to keep a competitive advantage on the competition.  Because of this, the capital requirements in this industry are extremely high.  Caesars spent $260,000 million on a remodel of their hotel in Las Vegas, along with other tangible resources being used to update their other locations on the strip.  Overall, it is safe to conclude that the overall threat of entry into this industry is low.

The next of the five forces is buyer power.  The buyers in the casino industry can be segmented into two rough groups. The high rollers, or “whales”, which are the top 5% of gamblers, account for 15-20% of total revenues. (1) The low 1.25% house edge (in baccarat, the whale game of choice) creates a situation where it is necessary for casinos to keep the high-rollers gambling for long periods of time, in an effort to take advantage of the law of averages. (1)  The normal gambler spends the most money at the slot machines, which make up 60% of revenues. (2) Large and fragmented, this group now has more power because of an increasing ability to compare hotel rates over the internet.  The similarity of casino floors has caused casinos to try to differentiate themselves by offering “themes” and new machines. Along with comps, casinos try to add switching costs to the slot playing gambler by offering cards that give perks to players based on accumulated slot plays. Overall, because of the similarity of casino end products and lack of ability for true differentiation, both groups of buyers exert power, with the whales exerting significant power because of their proportional per capita revenue generation. Therefore, the force of buyer power is strong in the casino industry.

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Following Porter’s Five Forces Model, another major aspect of Caesar’s industry attractiveness is supplier power.  Evaluating the supplier power in a large casino/resort does not present any straightforward answers.  Supplier power is paradoxically quite low, as well as quite high.  Many of the resources used by the organization come from nearly perfectly-competitive industries.  There is little differentiation in pillows for hotel rooms, foods for the restaurants, and plastic casino chips.  Guests do not even differentiate between slot machines for the most part.  However, entertainment is, and always has been, a significant part of the casino industry.  Recent entertainers at our ...

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