Strategy Formulation Work for MGM Resorts International - Case Study Example

? MGM Resorts International Table of Contents I. Strategic Profile, Purpose of Case Analysis 3 II. Situation Analysis 5 A. General Analysis of the Environment 5 B. Industry Analysis 6 C. Competitor Analysis 7 D. Internal Analysis 7 III. SWOT Analysis 8 A. Strengths 8 B. Weaknesses 8 C. Opportunities 9 D. Threats 9 IV. Strategy Formulation 9 A. Strategic Alternatives 9 B. Alternative Evaluation 10 C. Alternative Choice 10 IV. Implementation of Strategic Alternative 11 A. Action Items 11 B. Action Plan 11 References 12 I. Strategic Profile, Purpose of Case Analysis This paper presents a case analysis and strategy formulation work for MGM Resorts International. The purpose the case analysis is precisely to determine the best strategic alternative for MGM Resorts International, given the business and general environment in which it operates, and given an analysis of its strengths and weaknesses, the threats to its business, and the opportunities that are present in the market. The paper also presents a plan for implementation of the chosen strategic alternative arising out of the strategic analysis. The firm in focus is properly a holding entity for a number of assets operating in the hospitality industry (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013). As a holding firm in the hospitality industry, the key business for MGM Resorts International is in the business of owning and operating resorts that are casinos. As such, it is in the business of offering within those casino resorts such services as retail, dining, entertainment, gaming, convention, hotel, and a number of corollary services and activities. Its presence is confined to two markets, the US domestic market, where it owns and operates 15 casino resorts throughout the United States, and the China Market, where MGM Macau has ownership of the casino resort known as MGM Macau resort and casino. The company has sole ownership and total control of operations for its US casino resorts, whose casino operations in particular are open the whole year round without pause and for 24 hours everyday, except for its operations at the Grand Victoria, which pause for work two hours out of 24 hours on a daily basis (Google Finance, 2013). Apart from the wholly owned resorts, MGM Resorts International also has 50 percent stakes in three other facilities, chief of them being CityCenter, where the company has half of total ownership stakes in the ARIA Resort and Casino, among other assets. Its MGM China Holdings control 51 percent of the MGM Macau Resort and Casino, apart from new planned developments for a Cotai resort and casino. Its expertise in the hospitality segment has allowed the holding firm, moreover, to get involved in a vast array of management agreements as well as development agreements for various projects worldwide, involving all kinds of projects outside of casino development as well as projects in casino and resorts development (MGM Resorts International, 2013). Its key bases of operations in the US, meanwhile, are Michigan, Nevada, and Mississippi, with additional stakes in properties in Illinois and Nevada outside of its core interests. In China its base of operations is essentially Macau These properties coupled with consulting and management services make up the totality of its core business offerings to the world (Bloomberg, 2013). A look at its 10-year stock performance shows that MGM Resorts International shares have traded in a relatively narrow band since sharply dropping from its peaks of close to 100 dollars a share in 2007. Current stock prices of about 12.86 dollars a share are within the narrow band that it has been in since that time (Google Finance, 2013) Image Source: Google Finance, 2013 Meanwhile, shorter-term investor sentiments towards the stock shows that many hedge funds and other investors are cautiously long on the stock, and recent developments that indicate some long-term investors such as Kirk Kerkorian are upping their shares in the company by buying more shares are boosting sentiment. The long-term prognosis for the company, meanwhile, remains to be uncertain, given the relatively long period of time since the stock has stagnated after the 2007 drop, and given that no new developments in the market seem to augur exceptionally well for the company (Schaeffer's Investment Research, 2013; Ripan, 2013). II. Situation Analysis A. General Analysis of the Environment A PEST Analysis shows that in the political aspects, for instance, the general stability of the US political environment means that the investment environment is also relatively stable, and MGM Resorts International's business fortunes on its ability to navigate through this general environment with sound strategies, good execution, and good management of its finances and operations. On the other hand, there are some persistent political uncertainties in China that may negatively impact the ability of MGM Resorts International to effectively strategize for the long term there, and execute on any long-term strategies (Mind Tools, 2013; Hui, 2012). Economic factors that are relevant include the long-term economic prospects for its bases of operations, namely the United States and China, with the heavier emphasis in the United States. Long-term prospects remain to be bright, even as short and medium term challenges include some situational uncertainties in the American economy. The fact that hedge funds are long on MGM means that these economic factors have been factored into those long-term decisions and do not impact the company substantially. Similarly, a cursory look at social and technological considerations reveals that such factors do not seem to materially impact the company's prospects moving forward (Mind Tools, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013). B. Industry Analysis An analysis of the industry using Porter's Five Forces analysis reveals that give the scale economies and the high degree of management knowledge necessary to compete in the industry, the threat of new entrants is low. Large conglomerates dominate the industry and will continue to do so, in the high-end markets where MGM Resorts International competes with the likes of Las Vegas Sands, Melco Crown, and Wynn International. The threat of substitutes is also relatively low, given that few entities are able to provide the wide array of hospitality products and services that MGM and competitors are able to offer. Rivalry is high, as evidenced by the small number of large competitors competing for scale and for high margin businesses such as casinos. The bargaining power of buyers is high, given that they are able to leverage the high level of competition and the similarity in the services offered to force the providers such as MGM to provide differentiated services, and to provide them at competitive rates to lure buyers/customers The bargaining power of suppliers, meanwhile, is conversely low, given that there are many alternative providers of the required services in this hospitality industry. The key to success here includes, on the one end scale economies and presence, and on the other hand differentiated services. Given all these considered factors, one can say that the industry is a very lucrative industry for the existing players, in spite of the competition (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008). C. Competitor Analysis A look at its competitors, on the other hand, shows that MGM Resorts International is competing in a hospitality business space dominated by giants with larger market capitalizations such as Wynn Resorts, Melco Crown, Las Vegas Sands, and Penn National Gaming. These entities are able to command price earnings ratios of anywhere from 17 to close to 31 in the case of Las Vegas Sands and Melco Crown Entertainment (Google Finance, 2013): Valuation Company name Price P/E ratio Price-to- book ratio Price-to- sales ratio Mkt Cap MGM MGM Resorts Inter... 12.86 1.44 0.69 6.29B MCRI Monarch Casino & ... 9.87 17.99 1.13 0.94 159.37M BYD Boyd Gaming Corpo... 8.85 2.53 0.31 768.82M MPEL Melco Crown Enter... 23.21 30.75 3.80 3.08 12.83B LVS Las Vegas Sands C... 54.97 29.71 6.48 4.11 45.31B TWOC Trans World Corpo... 2.50 9.84 0.60 0.58 22.18M PENN Penn National Gam... 55.60 27.54 1.91 1.49 4.32B CNTY Century Casinos, ... 2.94 17.31 0.60 0.99 70.94M ASCA Ameristar Casinos... 26.29 11.75 0.72 866.49M WYNN Wynn Resorts, Lim... 127.16 26.43 2.47 12.84B PNK Pinnacle Entertai... 16.38 2.13 0.80 956.29M Table Source: Google Finance, 2013 Looking at the other metrics above, it is also clear that compared to competition, MGM Resorts International shares command a lower valuation versus book value and sales in comparison to such leading entities as Las Vegas Sands, which is able to command a price to sales ratio of 4.11, where MGM Resorts International commands a price to sales ratio of just 0.69. Share price to book value is also lower for MGM Resorts, at just 1.44, compared to Las Vegas Sands, which has a price to book ratio of 6.48 (Google Finance, 2013). D. Internal Analysis The numbers show a company that has been undervalued by the investor community relative to its competition, as reflected in stagnant share prices over the past six years, and lower valuation on a number of metrics, including price to book ratios and price to sales and earnings ratios. On the other hand, in an industry dominated by big players, MGM remains large, even in terms of overall market capitalization. This is an indication that if the company is able to navigate through a successful strategy moving forward, it can improve its situation and standing in the market too, from where it is at present (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008). III. SWOT Analysis A. Strengths Its strong financials and large market capitalization, together with its brand and its substantial scale in the US domestic market, are key strengths. Likewise, its presence in Macau bodes well for its ability to diversify and operate in a different market. Its management skills are also a source of strength collectively (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008). B. Weaknesses Its weaknesses include its inability to attract higher investor interest relative to competition, which is an indication of underlying operational, strategic and financial inferiorities relative to larger players in the United States. These need to be addressed with a sound long-term strategy for growth that is sustainable and that is profitable, dealing with those weaknesses and inferiorities relative to the rest of the industry (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008). C. Opportunities Given its large presence in the US but limited presence in other emerging markets such as China and other parts of Asia, for instance, it makes sense for MGM to try and explore opportunities for expansion in foreign markets. There are also opportunities to benefit from the long-term growth in the US economy, to try and fortify its bases of operations there and catch a slice of that growth with improvements to current offerings, and expansion to new geographies and new services (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008).. D. Threats External threats include the threat of competition in the US and in China undermining its properties and current investments. Internal threats include failure to address the many internal weaknesses in operations and in its financial management that has attracted the low current valuations for the firm (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008).. IV. Strategy Formulation A. Strategic Alternatives From the preceding analysis three strategic alternatives emerge. The first strategic alternative is to grow the domestic business organically, by fortifying the current properties and services to prepare the firm to capitalize on the long-term growth of the economy. The second strategic alternative is to expand domestically, by acquiring and developing new properties and expanding geographically to more states and locations in the United States. This can also be done via mergers and acquisitions. The third strategic alternative is to expand internationally, by building on the footprint in Macau to expand to other markets in Asia and the rest of the world (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008).. B. Alternative Evaluation Growing organically has its strengths, but is limited by the fact that MGM has not had a successful track record keeping still. Also, competitors are not expected to just do this, and it is wise to expect that competition will aggressively try to grow moving forward. The alternative to grow aggressively in the US and in other parts of the world can be combined into a single aggressive growth strategy, but has its own sets of risks, including the failure to derive margins from such aggressive growth, due to failure in operations or strategy execution or a combination of such factors springing from hasty growth pursuit (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008). C. Alternative Choice Given the firm's strengths and limitations, as well as the potential upsides, the recommended strategy is for MGM to pursue a growth strategy in the United States, as described in the previous sections (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008).. IV. Implementation of Strategic Alternative A. Action Items There are three action items. One is expanding offerings and potential revenues from current properties. Two is expanding footprint through purchases and mergers to grow the company size by revenues and assets. Three is to execute on strategy to maximize returns from expansion (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008). B. Action Plan The strategy for growth needs to be supplemented with a plan for acquisitions and for mergers. The second aspect of this is to draw up financing options, in partnership with a trusted investment bank. The third leg of the plan of action is to engage top management in the search for properties to be acquired, and to draw out plans to develop and market the properties over the next five years (Google Finance, 2013; Bloomberg, 2013; MGM Resorts International, 2013; Schaeffer's Investment Research, 2013; Ripan, 2013; Porter, 2008). References Bloomberg (2013). MGM Resorts International MGM:US. Bloomberg.com. Retrieved from http://www.bloomberg.com/quote/MGM:US Google Finance (2013). MGM Resorts International (NYSE: MGM). Google. Retrieved from http://www.google.com/finance?cid=21913 Hui, W. (2012). China's challenges: political change, pollution and protest. The Guardian Retrieved from http://www.guardian.co.uk/world/2012/mar/18/china-challenges-next-generation Mind Tools (2013). PEST Analysis. MindTools.com. Retrieved from http://www.mindtools.com/pages/article/newTMC_09.htm MGM Resorts International (2013). Company Overview. MGMResorts Retrieved from http://mgmresorts.investorroom.com/ Porter, M. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review. Retrieved from http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ Ripan, O. (2013). MGM Resorts International (NYSE: MGM): Hedge Funds Are Bullish and Insiders Are Bearish, What Should You Do? Insider Monkey Retrieved from http://www.insidermonkey.com/blog/mgm-resorts-international-nysemgm-hedge-funds-are-bullish-and-insiders-are-bearish-what-should-you-do-92706/ Schaeffer's Investment Research (2013). MGM Resorts International Option Volume Explodes on Kerkorian News. Minyanville. Retrieved from http://www.minyanville.com/trading-and-investing/options/articles/MGM-Resorts-International-Option-Volume-Explodes/3/15/2013/id/48751?refresh=1 Read More