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Group Members: Marco Cersosimo 773626 Margherita Greppi 773656 Bingkun Ge 661363 Linghui Zhou 677598

Millenium Leisure Case Study

1. Relative Performance Evaluation

Definition

The so called stack-ranking method, otherwise known as ‘rank and yank’, involves

evaluating the performance of employees based on their relative contribution to the overall results. The evaluation may occur at different levels of the firm and may be limited

to certain reference groups identified by the management. The use of ranking involves a comparison between employees at the same hierarchical level and may occur under the

same or across divisions (Giumetti, Schroeder & Switzer, 2015). Relative performance is then applied to a bell curve, and those that are at the bottom end are either terminated or

invited to undertake some training, while employees at the top are rewarded by receiving bonuses, promotions or recognition (Grote, 2005).

The literature review has allowed us to identify the pros and cons of stack-ranking, summarised in the following table:

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Feasibility In the light of Millenium Leisure’s objectives and culture, we believe that stack-ranking

would not be an effective performance appraisal system. The main reason is linked to its potential downturns on teamwork and innovation, key drivers of competitive advantage in this industry. RPE in fact may be an obstacle for innovative ideas to thrive in the company

(Yeh, 2015) and has therefore proved to be unsuitable for dynamic, knowledge-driven environments (Garcia & Tor, 2007). Innovation is a collaborative process to deliver greater

value and with RPE employees would not be encouraged to work together to achieve common goals, focusing more on individual performance. If employees don’t have

incentives to share and collaborate, Millenium Leisure may find difficulty finding and exploiting new opportunities to respond to the growing competitive pressure and

changes in customer needs.

The use of RPE across divisions by using key financial metrics as a basis for comparison would enhance competition across divisions, that could affect corporate performance in

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the long run. The current objective is to dedicate resources to growth, rather than to

identify the best and worst performers. Furthermore, since the volatility of the industry is moderately low (IBISWorld, 2015), the advantage of RPE to absorb external,

unpredictable shocks would not be justifiable.

2. Gaming in Australia - Industry Analysis

Market share concentration

Considering the international gaming industry, the USA has always dominated the market, but recently the competition with the Asian Pacific area has become stronger and this

trend is expected to continue. In particular, from 2008 the chinese city of Macau has been nominated the “Monte Carlo of the Orient”, replacing Las Vegas as the new leader within

the gaming industry. Singapore is now holding the third position within the market. Nevertheless, the rise of the Asian companies in the gaming industry has been slowed

down by the regulations imposed by the Chinese Government to strictly monitor players.

The Australian gaming industry instead is highly concentrated since there are two major players and the others split the rest of the market. This phenomenon is the consequence

of high barriers to entry in this business. However, some changes have occurred since the government has modified the regulation in 2012 and now venue-operators can

operate in the market as well.

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(Source: IBIS World Industry Report C2499b, January 2015, Nick Flores)

Barriers to entry

• Government regulations, requirements and licenses specific for each jurisdiction; • Ongoing investments in R&D, necessary to stay in this highly competitive and

capital intensive market, especially since the expansion of online gambling has occurred;

• Time needed to accumulate useful know-how, build networks and create a strong long-term reputation;

• The Australian gaming industry has recently entered in a stagnant phase, making the segment less attractive for potential operators;

• Since the market is highly concentrated, buyers and suppliers have a high degree of bargaining power.

Financial analysis

The global gaming industry and online gambling are expected to grow at a CAGR of

8.96% within the next five years. In the USA, expenditures on gaming machines are forecasted to increase 5% annually. The Asian Pacific market is expected to grow at an

ever faster rate, especially Macau and Singapore. The Asian Pacific area will therefore count for the 43.4% of the total global market (PwC, 2015)

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The Australian gaming industry on the other hand has demonstrated in the past to be

profitable, with high revenues, employment rate and gaming expenditure per capita. However, the industry has been negatively affected by the global financial crisis and

clients are now betting and investing less money due to the rise of interest rates. The gaming sector has been in a declining phase over the past five years and empirical data

show that the annual growth from 2010 to 2015 was -0.7% and is expected to stay the same in the next five years (IBISWorld, 2015).

Law/Regulation

The gaming industry has been always regulated at state and territory level rather than by the Commonwealth (Productivity Commission, 2010). One of the biggest regulations in

the gaming industry was the liberalisation of electronic gaming machines (EGMs). Both federal and state government recognise they need to control the spread of EGMs due to

increasing concern (Bank, 2003). As a consequence, the Productivity Commission requires that private organisations who want to introduce or install additional EGMs in their venues must demonstrate Social Impact Assessment statements (SIAs).

Online gaming is the new trend and is highly regulated by the Interactive Gambling Act 2001 in Australia, which makes it an offence to provide or advertise interactive gambling

to Australians. Although on the global level online gaming still remains an illegal activity, in many countries the trend has seen an increase of liberalization recently (KPMG

International, 2010)

Channels

Minister for Gaming places a range of regulations and restrictions to the number of

machines in approved licensed venues, such as clubs and hotels (Victorian Commission for Gambling and Liquor Regulation, 2012). Therefore, there is increasing competition

among the operators to get access to gaming venues. In addition, Australian Government’s highly restricted regulation has lead companies to seek for profitable

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opportunities in the international market, offshoring activities for more convenient

alternatives.

Innovation

Recently, the biggest change in the gaming industry is technology, more specifically data collecting technology to gather complete and valid data for monitoring purposes. With

the old gaming operating systems reaching the end of their life cycle, more knowledge intensive terminals, such as electronic gaming machines and online gaming, are gaining

popularity.

Two challenges associated with technological innovation lie in accessing and controlling data, since the monitoring of the operations plays a very important role in maintaining

data security and integrity. As Tabcorp Group mentioned in its 2015 annual report, the group’s businesses highly rely on the successful control of technology security risks, to

avoid threats such as cyber attacks, that would affect the overall performance of the firm. Part of the monitoring system developed by the Productivity Commission (1999) is

Productivity Commission’s Methodological Approach, which quantifies the social benefits

and costs associated with legal gambling, using consumer surplus to gauge gambling’s economic effects.

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3. Balanced Scorecard The measures identified in the Balanced Scorecard have been selected by considering

the divisional manager’s span of control and accountability. The interconnected measures relate to the company’s strategy, its value system and the key drivers of success in the

gaming industry

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People and leadership

Employee training is fundamental to promote a positive learning environment inside the

firm. Enhancing worker’s hard and soft skills will boost their productivity and efficiency, that will be positively reflected in the quality of organisational processes. Ahire and

Dreyfus (2000) argue that managing quality requires employees to be able to measure and exploit data efficiently. Firms that heavily rely on innovation must in fact provide their

staff access to valuable and specific know-how. Training can have a positive impact on employee’s attachment, satisfaction and commitment to the firm (Kaynak, 2003).

For the gaming division, the engagement level of employees is a key contributor to

organisational success. Roof, R. (2015) denoted that a highly engaged workforce is often linked with enhanced organisational payoffs, such as improved customer service and

efficiency. To better understand its workforce engagement, Millenium Leisures should adopt satisfaction surveys. In response to the survey’s findings, employees are required

to engage in seminars, training and group meetings. More collaboration and satisfaction can lead to higher commitment, that will lead to an increase of the process quality.

The fortitude to invest the necessary resources in innovation can be measured by the way time is managed inside a company. As Kim & Yoon (2015) point out, the degree to which

an employee perceives senior managers’ transformational leadership is positively related to the degree to which the employee perceives a culture of innovation. By emphasising

the importance of innovation from the executive’s perspective will allow it to be emphasised at the organisational level as well. A strong innovative culture will help ML

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increase the success rate of new products and the revenues generated by them, hence

improve the process quality and gain larger market share.

Organisation

CSR is the set of intangible assets that involve taking actions that go beyond legal

requirements by taking social expectations into consideration. One of the possible ways to measure CSR is the number of legal instances presented against the company for

misconduct on an annual basis. ML’s objective would be to minimise them to reinforce

brand image and reputation, and achieve greater integrity, legitimacy and fairness. This would lead to a higher retention of existing customers as well as attract new ones, therefore expanding market share.

An empirical study conducted by Vong and Wonn (2013) in the gaming industry showed how Corporate Social Performance (CSP) can positively affect financial and

market performance by increasing the transparency of business operations to gain higher trust. This will also attract valuable human resources, therefore thriving innovation and

reducing recruiting and training costs.

Process quality can be measured by using the throughput rate of successful projects,

calculated as the percentage out of all the projects that are implemented by the firm on an annual basis. This measure captures both the efficiency and effectiveness of the

internal processes that are involved in delivering innovation to the market, which is a key driver of success in this industry. We linked employee engagement and training to this

measure because higher commitment and more skillful staff can contribute to deliver more successful products as a result of a collaborative process.

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Firms in this industry have shifted their focus to high value adding activities, therefore

outsourcing manufacturing. This carries the need to constantly innovate to set industry standards and be leaders in the market. The attention has shifted to the design and

development of software and hardware (IBISWorld, 2015), and will require an increasing amount of technological know-how. By increasing capital expenditure in R&D, the firm

can design products that are more likely to succeed in the market because they better respond to customer needs. A comparison needs to be made with other competitors to

set industry level benchmarks.

Customer and growth perspective

Since the gaming industry is highly competitive and regulated both domestically and

internationally, one of the key objectives set by the gaming division is to increase market share, a key driver of revenue growth. Market share can be calculated as a percentage of the total revenue of the organisation over the total industry revenue, measured on

different market segmentations (by products, geographic area, clients concentration) to evaluate the relevant manager who has control over that segment. Market share is the

only measure used in our BSC that is based on the overall firm because we thought that evaluating the divisional manager on it would enhance the goal congruence between the

division and the organisation, reducing the agency issue.

Integrity is one of the ML’s values and missions, so the firm is committed to build long-term relationships with its customers in an environment of responsible gambling. To

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achieve this organisational objective, managers are required to increase customer loyalty

at the divisional level. This goal can be calculated as the total number of active customers on an annual basis, through reward card programs or membership systems. If the number

of active customers expands, the revenues and market share is expected to increase proportionately. This measurement can be used to collect useful data for monitoring

purposes and infer valuable information on the company’s underlying commitment to responsible gambling.

The recent changes in the segment’s structure and regulation has significantly increased

the competition among gaming venues. Therefore, companies need to seek for innovative solutions. Since customers constantly look for new gaming experiences, innovation is

important to attract new customers and retain existing ones. By frequently launching successful new products, customer’s gaming experience will be enriched and the

perceived service quality will be enhanced. The success of new products launched can be measured by the percentage of revenues that they generate over total divisional income. Evaluating managers on this measure encourages them to focus more on

product innovation, which is a divisional and organisational objective. By doing this, the number of active players and the customer retention rate will increase, therefore

maximising the investment return from gaming venues.

Financial perspective

Since the market is highly concentrated and the industry is in its phase of stagnation because of the limiting regulatory framework, national players are seeking to invest

abroad to increase and diversify their revenue streams. The Interactive Gambling Act of 2001 made it illegal for operators to offer ‘real-money’ online interactive gambling to

residents in Australia and banned advertising. However, Australian operators are allowed

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to offer their gambling services to gamblers outside national boundaries. It is therefore

important for ML to seek for opportunities in expanding markets to pursue a sustainable leadership and international presence over time by increasing market share. ML’s

strategy to internationalise is coherently reflected in this measure and can be used to evaluate the efforts of the divisional manager to expand the unit’s horizons.

Divisional EBITDA adequately synthesizes the core profitability of the unit, since it is the income free from interests, taxes, amortization and depreciation. The divisional managers

evaluated on this financial measure are therefore incentivised to increase the operating cash flow. This helps the unit to prepare for the structural changes that the new licensing

laws and government regulations will require. Increasing the retention rate and launching successful and profitable products can benefit the division’s overall financial health.

ROI is an effective measure to evaluate ML’s divisional managers since increasing capital

investments, maximising their return and improving the overall performance of the organisation are some of the priorities set by ML. Furthermore, if the divisional managers’

reward system is based on the ROI, they will be more encouraged to increase this measure. High returns on investment can solidify the firm’s position in the market and

help retain and attract clients. Since investments in R&D deliver their benefits in the long run, it’s important to

consider ROI over a long-term (approximately 2 or 3 years) otherwise managers could be encouraged to give up potentially profitable investments because they could negatively

affect the divisional profitability in the short-term. ML has in fact forecasted to achieve the organisational growth objective over a long-term.

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