Harrah’s: It’s all Love. Man.

Gary Loveman’s tenure at Harrah’s was an interesting one to follow.  The changes he made to the company when he was there changed the corporate structure of the company to its very core.  He did this in multiple ways.  But the most interesting ones to me were the ideas of meritocratic management, accountability, and using data in his rewards system.

Meritocratic management was the idea that the company should be managed and employees should be punished or rewarded based on merit.  When employees know that they cannot be promoted based on anything but their merit, they will be certain to try as hard as they can to increase the perception of said merit.  While this was good in the sense that it got all of the employees working harder, there is a chance it could have also increased competition among employees.  This had the potential to create competitive silos.  A silo occurs when employees become pitted against each other and end up hurting the whole as they focus more on the improvement of the individual parts.

Accountability was a big part of Loveman’s strategy.  This goes hand-in-hand with the meritocracy.  Making employees accountable for their every action insured that they paid attention to  every action.  Loveman drove this point home by being accountable himself.  He admitted his own mistakes and did not try to hide his faults.  This created a level of trust between Loveman and his employees.  When the Harrah’s employees saw the Loveman had credibility and practiced what he preached, it made it easier for them to trust him.

Loveman improved Harrah’s customer service by introducing a tiered reward system based on data.  This is gone over in more detail in my earlier posting entitled “Getting Lucky With Data”.  But basically what he did was look for trends in players and use it to project their lifetime value.  Those with higher lifetime values were catered to more so than those with lower projected values.  The tiered system he introduced gave customers different levels of rewards.  They were inspired to spend more at Harrah’s casinos because they saw others that had the higher levels of rewards (like Diamond level).

Loveman brought a lot of change to Harrah’s, and it seemed that he did well.  It would be interesting to see not only how these strategies have aged, but also an article that addressed more of the negatives of this strategy. No strategy is perfect, and I don’t believe this one was either.  Do you?

Dean’s Disease

Bedeian’s article about the Dean’s Disease is quite a read.  In it, the author describes what the Dean’s Disease is, why it is the large problem that it is, and how it can possibly be stopped.  Two things are clear: the Dean’s Disease can be debilitating to a college; and Bedeian has had some pretty serious problems with university administration. Bedeian states that the Dean’s Disease occurs when all of the members of a college start to only go along with a Dean’s wishes.  He says this happens because deans possesses a large amount of power over faculty.  Deans influence their job advancement and security; as well as having direct influence over the privileges that individual faculty members may receive.

Bedeian believes that the large influence the dean of some colleges hold pushes faculty to get in line with their way of thinking.  An advantage to going along with the Dean is that these faculty find themselves in their Dean’s “inner circle”.  However, in order to get into, and remain in the inner circle, one must almost always agree with the things that the Dean thinks.  This can often lead to a pretty serious case of group think within a department.  Group think would be very damaging to an academic department becasue it would limit what the professors were able to teach; thereby limiting the quality of education offered at that school.  For example: if the Dean of a school of economics is a little more right wing in his leanings and believes in a strict free market based on the teachings of Adam Smith, than what are the chances that anything else will be taught?  Certainly under this type of academic dictatorship no one would think of issuing Keynes as required reading.  And quite frankly, an economics degree that comes without a thorough discussion of the philosophies of Keynes, is not really an economics degree at all.

Thankfully, Bedeian does offer some light at the end of the tunnel.  He believes that by making sure the college has long standing guidelines and restrictions of deans, than this disease may be curtailed.  The most important of these are that every school should establish values and encourage independent thought.  The former could possibly be seen as something that would lead to more severe Dean’s Disease if viewed in the wrong context.  If these values were ideological in nature, than the Keynes-less economics curriculum described above could come true. Instead these values should be taken to mean that a college should develop values in the way they conduct their research.  This will insure that the research done at the school is only of the highest quality.  This would eliminate group think as different researchers would be able to explore the topics they are truly passionate about, and come to unique conclusions.  Of course, the principle that will do the best to exterminate group think from overtaking a department is the notion that deans should encourage different opinions.  The great thoughts that are taught in the university were likely gleaned from intellectual conflict from long ago. It seems that knowing this would drive all institutions to declare diversity of thought as the status quo.  A status quo, that does not include the Dean’s Disease.

Harrahs: It’s All Love. Man

Gary Loveman’s tenure at Harrah’s was an interesting one to follow.  The changes he made to the company when he was there changed the corporate structure of the company to its very core.  He did this in multiple ways.  But the most interesting ones to me were the ideas of meritocratic management, accountability, and using data in his rewards system.

Meritocratic management was the idea that the company should be managed and employees should be punished or rewarded based on merit.  When employees know that they cannot be promoted based on anything but their merit, they will be certain to try as hard as they can to increase the perception of said merit.  While this was good in the sense that it got all of the employees working harder, there is a chance it could have also increased competition among employees.  This had the potential to create competitive silos.  A silo occurs when employees become pitted against each other and end up hurting the whole as they focus more on the improvement of the individual parts.

Accountability was a big part of Loveman’s strategy.  This goes hand-in-hand with the meritocracy.  Making employees accountable for their every action insured that they paid attention to  every action.  Loveman drove this point home by being accountable himself.  He admitted his own mistakes and did not try to hide his faults.  This created a level of trust between Loveman and his employees.  When the Harrah’s employees saw the Loveman had credibility and practiced what he preached, it made it easier for them to trust him.

Loveman improved Harrah’s customer service by introducing a tiered reward system based on data.  This is gone over in more detail in my earlier posting entitled “Getting Lucky With Data”.  But basically what he did was look for trends in players and use it to project their lifetime value.  Those with higher lifetime values were catered to more so than those with lower projected values.  The tiered system he introduced gave customers different levels of rewards.  They were inspired to spend more at Harrah’s casinos because they saw others that had the higher levels of rewards (like Diamond level).

Loveman brought a lot of change to Harrah’s, and it seemed that he did well.  It would be interesting to see not only how these strategies have aged, but also an article that addressed more of the negatives of this strategy. No strategy is perfect, and I don’t believe this one was either.  Do you?

Robin’s Choice

This case details the choices faced by Robin Astrigo of Astrigo Holding Company, as he tries to cut costs.  It is an interesting article and gives insightful looks into all of the way that a manager could go about trying to cut payroll costs in a time of economic recession.  There are many different options laid out to him by his executive board.  I had never considered all of the different ways that managers might choose to lay off employees.  I had only ever considered that there would be the decision whether or not to have layoffs.  Once it was decided that layoffs would happen, I assumed that most companies already had a plan in place on how to do it.

The first method presented was “first in, first out”.  Under this program older employees would be let go.  This would be good because it would “trim dead wood” but it would be bad because of the pension plans Astrigo would have to pay.  Also, like many other possible layoff methods, it uses broad targeting and lays off people at random.  The next method was “rank and yank”.  Under this system employees were to be judged on the basis of the previous years performance reviews, after which the lowest scoring ten percent would be let go.  This system does have merit in that it is not just random firing, however after talking at such great lengths in this course about how unreliable performance evaluations are, this does not seem like a solid method either.  The third strategy was to fire all of the newest people.  This would eliminate the problem of paying pensions and severance packages, but would also eliminate the best young talent from the company.  Furthermore, is Astrigo got the reputation for firing younger employees, they could be severely hampered when competing for the top business school graduates.  It was also suggested that Astrigo should start selling off assets.  This plan would be very short sighted.  Firstly, it would do nothing to increase investor confidence (which is really why the stock price dropped so much in the first place).  Secondly, those assets might be hurting the bottom line during the current recession, but it is very possible they could turn into steady sources of revenue when the economy picks back up.  Selling them now may hurt Astrigo’s ability to hire back employees later when the market turns.  The final course of action presented to Robin was to have employees take a 50% pay cut and then finance all they were short on from a cash fund that Astrigo has sitting in the bank for liquidity purposes.

I think that the two solutions that make the most sense are the “first in, first out” policy, and the final policy where every employee takes a pay cut.  The only real reason that the former appeals to me is because it may cut bloated salaries.  This would be good, and it would also clear room for the new talent coming up through the ranks.  However, severance packages and pensions would be expensive for these people.  Also, the company would be eliminating all of their most experienced employees, and the wealth of knowledge that goes with them.  The other strategy, where everyone takes a pay cut, is probably the best solution.  First of all, it would show the employees that Astrigo is a firm that really values their workers.  Also, it is actually not bad to use cash during a recession.  During economic downturns, the interest rate is often lowered.  Because of this, the cash sitting in the bank is not growing at the rate it would in a normal economic climate.  Also, Robin is saving the money for acquiring an important asset, what asset is more important than the workers?  As long as Astrigo can keep from having a lot of short term liabilities, it would probably be smart for them to use some cash.  Other options that were not brought up were financing their deficit through either debt or the issuing of stock.  Although it is possible that taking on more debt in a recession is a bad idea (although interest rates are low).  All in all it is smart for Astrigo to go with the pay cut idea.  It may not be the perfect solution, but none of these are.  It is important for the employees and the shareholders to see everyone making sacrifices together, this is the only solution where that can happen.

Getting Lucky With Data

The case study on Harrah’s was very good, and explored some interesting ways that data can be used to improve a business (and eventually, an industry).  After reading the article it seemed that there were two major innovations that Harrah’s made in terms of customer service improvement.  We have already gone over the benefits of customer service many times in this class and how beneficial it can be in a business.  However from the article it would appear that the casino industry hadn’t bought into this in the same way that others had (like airlines).  Harrah’s main rivals were more concerned with one-upping each other in terms of spectacle and sparkling new amenities.  While this may be a fine strategy for the flagship casino on Las Vegas Boulevard, Harrah’s realized that it was not as efficient in terms of expansion.  Put it this way: When people go to the fantasy land that is the strip in Las Vegas, they go maybe once every few years (or for some once a lifetime), and they will be impressed by the bigger, shinier casinos.  However, for those who gamble regularly for recreation, they could care less about how many fountains a casino has.  One can only watch the pirate battle at Treasure Island so many times before it becomes old hat.

Harrah’s saw that a better way of competing would be to put assets into things like better customer service and rewards.  The first way they took advantage of this was by developing a tiered customer reward system.  This inspired customers to spend more at their casinos to earn more reward and get better service and perks.  Harrah’s made sure this was so appealing to customers by practicing exemplary customer service, such as no waiting and complementary rooms, in front of all guests of the casino.  Also, by putting the consumer in the silo (essentially in competition for the best rewards), but the employees in an environment where team success is the most important (due to the property-specific bonuses) is a great way to use competition to motivate.

The other thing they do, and probably the more innovative measure, is looking at the activities of casino patrons and determining what types of services and comps they would most like to have.  Also, analyzing the data has allowed them to figure out which patrons spend the most at the casinos and who will add the most value to the casinos in the future.  It is clear that looking at data trends when making decisions about customer service is a good idea.  It is interesting that other casinos were not able to copy this model.  It is also good that they did not engage in any data mining in their observations of the data.

This was a very interesting article and it is cool to see how an emphasis on customer service can change the way an industry is run and approached.

Good to Great to Maybe Not

The article by Niendorf and Beck criticizing Collins’ land mark 2001 book Good To Great, raised a few interesting points.  In their response to Collins’s book they question his research methods.  They claim that he is guilty of data mining and that he searched for trends to justify things he wanted to say about the companies he believed had made the transition from good to great.  Some of these points are well made, especially those about data mining.  However, I am not sure that all of their criticisms are valid.

One of the criticisms the authors spend a lot of time looking at is the statistic Collins used about the “great” returns being made to stockholders by the GTG companies.  Niendorf and Beck point out that the returns of the 11 GTG companies are only one third as large as those of the companies with the biggest share holder returns on the Fortune 500.  However, in making this comparison the authors fail to take into account a number of factors that could contribute to this disparity.  Firstly, there are other ways that companies can add value to the portfolios of their stockholders.  One of these is by paying out dividends.  Dividends are quarterly (or annual) payments made to shareholders.  Usually these are paid out as a percentage of every share that the stockholder has in the company; ie. 59% = $0.59 for every share owned.  Couldn’t it be possible that Collins’ 11 pay dividends?  This is certainly the case with Kimberly-Clark.  In 2009, they raised their dividends 3.4 percent to pay out 60 cents per share (NYSE).  This is the 37th year in a row that they have raised their percent payment on dividends.  While it may be true that Kimberly-Clark only had a stock price growth of 6.2% during the study period, they were paying dividends.  It is likely that these high payouts kept stockholders happy.  Also, it is an understood negative of dividends that company paying them will not be able to invest as much in the company, and therefore will not grow as quickly.  Obviously, the stockholders who hold shares of Kimberly Clark are okay with this as they continue to invest.

Another aspect of shareholder returns that the authors failed to mentioned, were the ages of the companies.  Younger companies will almost always have more shareholder growth than older ones.  There are two reasons for this.  Firstly, younger companies have not been around as long and they may be in an emerging marketplace. Because of this, they have more room to grow than older, more established companies.  Secondly, younger companies are riskier to invest in than older ones.  Because of that, they have to offer greater incentives to get people to invest in them; incentives like high shareholder returns and robust growth.  When one remembers these factors, the disparity between the GTG 11 and the companies listed by Niendorf and Beck is obvious.  Some of the companies selected by Collins are ancient. Fore example, Wells Fargo was started in 1852!  NVR on the other hand, was only started in 1980.  One would expect a company started during the Reagan years to post higher returns than one started during the Franklin Pierce administration.

Niendorf and Beck make some good points.  Collins and his team were clearly guilty of data mining and used statistical patterns to verify foregone conclusions.  However, Niendorf and Beck also used statistics that may have been less than comprehensive to make their points.  This article does serve to show that statistics can be manipulated to make any point that the authors want. Unfortunately for them, they don’t prove this in quite they way they were hoping.

The evidence

The article titled “Evidence Based Management” by Pfeffer and Sutton raised an interesting debate about what type of information managers and companies should rely on when they are making decisions.  The article said that oftentimes, managers are more likely to rely on their own personal experience and things they learned in school 30 years ago, then they are to rely on new, cutting edge, research.  Of the debates we’ve read about so far this semester, this may be the most interesting one for me.  Both sides of the argument have valid points, and both sides have some faults.

The authors fall on the side of research and evidence.  They feel that if there is new evidence being prepared by 1000’s of very intelligent, very qualified researchers, than it should really be put to use.  To drive this point home they use the example of a hospital.  Would someone rather have doctors that are using the latest, most advanced procedures, or would they prefer to be treated by someone who hasn’t received any formal medical training since the Nixon administration?

On the flip side of this, I ask you to consider if one might rather have the more experienced doctor running a procedure?  Of course new research is better than old research.  But making this a question of those two things is to over simplify the matter.  Rather, one should ask if more can be learned from articles and textbooks, or from hands-on experience?  Their are pretty substantial arguments for the latter.  For instance, in the article last week about Arrow Logistics, younger, college-aged sales people were referred to as I.R.O.C., or idiots right out of college.  These IROC’s had more education and more up-to-date training than the older sales people, but they still had to be told what to do all the time.   This is because they did not have any experience in the field.  For the managers at Arrow, they would be far better served taking advice based on the experience  of the older sales people than on the book-learned college recruits.

After reviewing both sides, I feel like I come down somewhere in the middle.  In an ideal world it is probably best to have experienced managers who are also open to learning new things.  A company may be able to manufacture managers like this by requiring managers of a certain level to read trade journals and attend managerial conferences.

Gaining this type of knowledge seems much more productive than hiring some big consulting firm.  By getting it straight from the books, a manager gets an uncompromised view of new tactics.  Academics should be writing and researching learn and make breakthroughs in their field.  And while they are paid somewhat by grants from corporations, they are primarily paid by the institution they work for.  Ideally, this would mean that academics are free to research what they want and come to the conclusions that the facts lead them to.  This may be different from some consulting firms where they are paid by corporations.  These companies may feel pressure to present information that their clients want to hear.

But I digress.  Mangers should be able to draw on their old experiences, and absorb new information.  But that is just my opinion. What do you think? Is one side of the argument stronger than the other?  Am I naive to believe they can be combined?

Group Think Cause and Effect

The Wall Street Journal article concentrated on the aftermath of the US invasion of Iraq in 2002.  Specifically in the summer of 2004 when it was discovered that some of the intelligence that was used to justify the invasion of Iraq may not have been up to the highest standards.  In the descriptions of the lead up to war congressmen who have reviewed the CIA, and particularly Director George Tenet’s actions, say that the agency suffered from an occurrence of “group think”.  They say that analysts were not encouraged to question assumptions and that the Director purposely skewed results so they would coincide with what people outside of the CIA wanted to hear.

If one recalls the lead up to Operation Iraqi Freedom, they will remember that it seemed clear the Bush Administration wanted to invade Iraq.  They not only justified the invasion based on the idea that Iraq may have weapons of mass destruction (WMD’s), but also that they were somehow connected to the terrorist attacks of September 11, 2001.  The Director of the CIA is appointed by the President, if he knew that this is what someone who was his “boss” wanted, it makes sense that he might try please him.  Along that same line of thought, it makes sense that the CIA analysts would want to please Tenet, who was their boss.  It seems that the group think in this situation was the result of a managerial mandate.  Here the CIA should have been working towards a conclusion that was the result of the evidence they compiled.  Instead, they worked towards finding evidence that would lead to the result that they had already decided on.  This can be a very dangerous practice for companies.  Had this been a real company and they only used specific market data that led them to justify the release of a manager’s pet product instead of the product the market actually wanted, the results would have been disastrous.  Not only would the company probably have lost a lot of money on the development of an unwarranted product, but the management probably would have been sacked and the R&D regulations re-written to have more checks and balances.

Having checks and balances is extremely important to any kind of decision making process.  If the factors that lead up to a decision are subject to checks and re-checks, they are more likely to be confirmed as viable or not.  Also, the fact that the only reports taken into consideration were from Iraqi exiles who had been exiled by the government should have been a huge red flag.  A company would never dream of getting their primary information from a potentially biased source.  And usually, I don’t believe that the CIA would either.  However, because analysts were basically told what to think and find, what choice did they have?  Group think may have been the symptom, but it was not the cause.  The cause was something that could lead to other problems besides group think.  The problem was managerial mandate.

Pickin’ up the trash

The article about the sins of commission was very interesting.  In it, some excellent points were raised about the nature of a commission based system and the problems that are often inherent to it.  The city of Albuquerque had had problems with the rising cost of trash.  To combat this, the city planner of Albuquerque decided to pay garbage men a fixed amount for eight hours of work.  He hoped that this would lead to them working more efficiently so that they could do all their work in the time they were getting paid for.  However, this incentive only motivated the garbage men to go through their routes quickly, not to do them effectively.

Truck drivers began going through their routes too quickly and not unloading their trucks every time they were supposed to.  Furthermore, they took to speeding as that allowed them to get through their routes more quickly.  These behaviors led to higher costs to the city in the form of fines and traffic tickets.

This happened because the city planner did not set up the incentives in the proper way.  The article mentions that it would be difficult to change the incentive structure without making it too complicated.  A possible solution could be to change the incentive structure os that instead of rewarding garbage men for their timeliness, they were instead given a base pay and then fined a small percentage of fines that they incur through their negligence.  One of these fines could be for not finishing the route in time.  This would ensure that the garbage men not only were timely in their pickups, but that they also did them properly.  This strategy is based on the notion that if rewards do not work, then penalties might.  This same train of thought worked when the Chinese government tried to curb birth rates in the 1970’s.

This seems like the best strategy in this situation.  By not pitting the garbage men in direct competition against each other or time, they will ensure that they will do their best work for the team as a whole.  However, it is possible that penalties could drive away some drivers.  But, from a financial perspective it will probably make sense for the city.  As that was the point of these regulations this will likely be the best course of action.

Much more leadery leadership

I thoroughly enjoyed the article about the new product development (NPD) teams.  And the style of leadership that is encouraged for them.  I like that the leaders workto make the teams non-competitive and goal oriented.  This is much better than other cases we have read where every salesman in a company is out for themselves.  By making team goals the priority, team work necessarily becomes a priority as well.  This will build a sense of camaraderie that many companies often struggle for years (and often in vain) to achieve.

I also really like the idea that team members should “own” the process with which they develop products.  In my operations class we often talk about the linear nature of development and how one group may not be able to start their process until another is completely done.  This isolation can also create problems where an unseen error comes up at step six of development, and the problem has to go all the way back to square one.  By having the R&D group work together they can not only expediate the process, but also communicate with one another to hopefully avoid the pitfalls of working in small, isolated, pods.  Secondly, the ownership concept is good because it will lead to the employees caring more about the projects that they are working on.  I they feel that it is “their baby” they are more likely to work harder, and with more care on it, to ensure that it comes out the best that it can.

Of course, none of this is possibile without the concept of the the team leader as a “coach or facilitator”.  This helps because it creates an environment where employees are not afraid of, and do not have to bend to every whim of, the boss.  By letting the employees work to the specifications that they think would be best, the leadership is allowing the engineers and researchers to do what they do best.  By not handing down mandates from on high, the leadership ensures that what the engineers think are the best ideas (and they’re probably right about that, they’re engineers after all) is used.  Furthermore, they allow R&D to take chances and make mistakes.  While it is true that it may be costly for a researcher to make a mistake every once and a while, it is nowhere near the cost of stifled innovation.  Even if it takes five misfires for the R&D team to come up with one breakthrough, the risk is worth it.  Also, it goes a long way to creating an environment where more of the best people want to work.  If most engineers had the choice between working somewhere where they were allowed large amounts of freedom or somewhere where there boss was “the star”, they would choose the former every time.  And if the best work there, than maybe the mistakes won’t roll in so frequently.

It was refreshing to read a case about a company who is doing leadership right.  Especially after the two stinkers we had earlier.

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