Where is the Money? Part 7 of 36: Innovation Analysis

Authors’ Note: We recently explored the role of innovation and the need for change leadership in the gaming industry. However, adapting and enhancing a business is just plain difficult. We can act on research, intuition and guts, but that is not enough. We must also know if our actions are effective. This brings us to the role of analytics, which is to identify opportunities for change and measure the impact of those changes. This article is the first in a sub-series that looks at the analytical methods associated with the identification of opportunities and methods to measure outcomes.

Finding opportunities is a combination of creative thinking, culture and guts. It takes guts to say, “I know we have always done things this way, but how about we try this?” This can then lead to a culture change whereby creative thinking and the challenging of norms be rewarded and even embedded in company culture.

A great means of enacting this change is through the implementation of discussions in a strategy room, sometimes referred to as a “war room.” We have discussed the power of war rooms in the past:

War rooms are places where teams meet to collaborate. They have existed for centuries and have been, as the name suggests, central to the intelligence activities of many wartime campaigns. The walls are typically plastered with initiatives that are central to the theme of the war room, as war rooms are the end point for what is often a huge data collection process and information consumption is almost always a team effort. … [W]ar rooms can and should play a critical role in the intelligence of business operations.

The Risk of Inaction
Too often stasis sets in when the question most often asked of an action is, “Why should we do this?” When taking on the task of change leadership, one should instead ask the question, “Why not?”

To bring this into an analytical context, consider the overall business goals. Let’s say we have a business called Aha Inc. with revenue of $100 million and a growth target of 5 percent for a year ($5 million). At Aha Inc., there is one idea that is a sure hit and will drive growth, but the question is when to implement the initiative. Figure 1 shows the annualized percentage growth figures required for the new initiative, depending on when it is implemented. Implementation in January or February requires a 5 percent annual growth improvement, while implementation in December requires a 60 percent annual growth improvement. In other words, in a world where growth is critical, acting sooner is just about the only way to succeed.

Strategic vs. Tactical Opportunities
Strategic opportunities offer the largest returns. These include things like building an entirely new casino or adding on a new hotel tower. The challenge with a strategic opportunity is that, despite all the planning, it is a big risk—not to mention that finding a great place to build a new casino is extremely difficult. However, when looking at operators from Macau to Singapore, from New York to Las Vegas, we can see that when these strategic decisions go well, there are strategic growth opportunities. But when they do not, the result can be as dire as bankruptcy. This is a high stakes game.

To win at this game, there are two paths. The first is the one described above—a large, expensive gamble that may pay off big returns or may lead to bust. This path is often taken since the person making the decision (an executive) is not always among the people who will pay the price (the lenders) if the decision leads to bankruptcy. Thus, it is tempting to “gamble with the house’s money.”

However, there is a better path that leads to long-term success. By investing continually in lower return but higher probability of success innovations, one can achieve the same long-term results with much less risk. Imagine that one company takes a big five-year risk with a 50 percent chance of success. If it succeeds, the company will experience 25 percent growth at the end of the five years. A second company instead takes on multiple strategic innovation initiatives, each with a 95 percent chance of producing a 5 percent lift. This second company, if successful all five years, will experience an overall growth of 27.6 percent, thanks to compounding. In addition, the probability of succeeding five years in a row is 77.3 percent—overall a much better gamble for the second company.

Measuring Risk for Tactical Initiatives
Now that we understand the risk of inaction, we can look at the risk of action. How can we evaluate whether initiatives are going to be positive without taking enormous risk? There are two methods.

Test and Control
From marketing to game mix to food and beverage service strategies, one can employ test and control methods to try different ways of changing your operations to improve profitability.

The math behind test and control is a gamblers dream. Let’s conduct a hypothetical test on $200,000 of monthly net revenue. This could be a new marketing initiative, conversion kits for a bank of games or a strategy to improve the number of beverage servers in a particular part of the casino. Let’s further suppose that our goal is to find a way to increase our net revenues by 5 percent.

If our test is successful, our new program will drive an incremental 5 percent * $200,000 = $10,000 per month. Over the course of a year, this new program will yield an incremental $120,000 of net revenue. On the other hand, if our test fails, we stop the program and only suffer the loss for the first month. In many cases, we are able to set up an experience where only half the net revenue received the test program, so in fact our total loss for the failed program is 5 percent * $100,000 = $5,000. Hence, the gambler’s dream: If our test succeeds, we grow our business by $120,000 over the course of the year. If it fails, we lose $5,000. Those are fantastic odds.

Act Fast and Frequently
What is the first thing a gambler does when he finds a game that is to his advantage? He plays as many hands as possible. The same is true for tactical initiatives. Change leaders in innovation must constantly be testing as many new programs as possible to take advantage of the fantastic odds in their favor. And as they learn from prior tests, they will be more informed about which tests in the future have the best chance of success, tilting the odds ever more in their favor.

Across all areas of the business, casino operators should be asking, “What new program can I try that may increase my profits, and how can I test this new program to make sure it works?”

Undersupply to Oversupply
Facing the undersupply of gaming back in the early 2000s, the best thing that operators could do was buy more gaming machines and work hard to cram them onto the gaming floor. In today’s oversupplied gaming world, however, that would likely just result in reallocation of the same revenue.

In an oversupplied gaming world, the challenge is deciphering the extremely complex dynamics around space, game type, customer preference and game theme. Let’s look deeper into the nature of complex systems and how to unlock innovation.

Complex Systems and Slot Optimization
According to Peter Drucker, “The fastest growing field of modern mathematics is the theory of complexity. It shows, with rigorous mathematical proof, that complex systems do not allow prediction; they are controlled by factors that are not statistically significant.” In the world of gaming, gaining control is a more complex challenge. Other processes can help, including the fine tuning process for gaming floor optimization.

Fine Tuning Change and Decision Agility
Once an initiative is underway, we need to constantly monitor it to determine if we can fine tune the results. This fine tuning of the decision making adds to the gambler’s dream of test and control—it is like counting the cards in blackjack. Let’s consider the example of altering the gaming floor by doing game conversions. As the game conversions are happening, the following four-step process shows how to combine the game revenue and devotion index derivative to give a clear set of actions to take during an active management process that accompanies the change.

Step 1: Monitor. This is an art. Watch for changes for overflow, yield management, market basket and overall revenue distribution.

Step 2: Devotion Analysis. Determine the preference of players playing on the gaming machines, and use this to monitor the market basket, devotion index and devotion index derivative (see sidebar).

Step 3: Change Matrix. During the change period, monitoring the change is essential. The combination of the devotion index derivative and the revenue volume index gives a clear game change action matrix (see Table 1).

Step 4: Movement Analysis. Notice that the high devotion index derivative games can be used to concentrate or move play to other locations. This requires special consideration for the nature of the gaming floor, asking questions like, “Where else do the players who are devoted to this game play?” and “Where does it make sense to move that game to?” It is virtually impossible to understand spatial data without a map. Understanding this association is key to enabling the art of gaming floor management.

Table 1: Game Change Action Matrix
Table 1: Game Change Action Matrix

Bringing It All Together
Innovation leadership requires guts and creativity, and in this article we have examined the risk of inaction and then drilled into high-level views of solid methods that provide a roadmap for how operators can gain value from the change. The two core methods presented—test and control and active monitoring—were very different. Test and control is very appropriate in database marketing and results in some special mathematics that would make any gambler happy. Active monitoring is a powerful method that can use devotion index derivatives to determine change in player devotion to a game.

1 http://www.casinoenterprisemanagement.com/articles/may-2012/where%E2%80%…, Cardno Thomas May 2012.
2 http://www.casinoenterprisemanagement.com/articles/august-2014/where-mon…, Cardno Thomas.
3 Drucker, Peter F. (2009-10-13). The Daily Drucker (p. 98). HarperCollins. Kindle Edition.

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