Strategic analysis of Melco Macau

STRATEGIC ANALYSIS OF MELCO MACAU

Melco Macau, alsoknown as Melco Crown Entertainment Limited (MPEL), is a developer,owner and operator of casino gaming and entertainment resortfacilities in Macau and Philippines. Melco Macau is headquartered inCotai, Macau. The company was incorporated in December 2014 andbecame registered as an oversea company in 2007. The company hasexperienced growth since its incorporation as a result of the rapidgrowth of the casino gaming and entertainment industry in the LasVegas strip, and acquisition of several companies and facilities. Oneof the initial acquisitions of Melco Crown is Publishing andBroadcasting Board. Among the businesses that Melco Crown operatesinclude: Altira Macau in Taipa, Macau City of Dreams in Cotai,Macau City Studio in Cotai Mocha Clubs in Macau and City of DreamsManila in Philippines. This paper studies the strategic position ofMelco Crown Entertainment Limited by conducting external and internalanalysis of the company.

Externalenvironment

The analysis ofthe external environment of MPEL is achieved through the use of twotechniques, PESTEL and the 5 forces analysis.

PESTEL analysis

PESTEL is used toassess the external factors within the environment which Melco Macauoperates. Melco Macau has no control over most of these factors. Theexternal environmental factors considered in PESTEL are political,economic, social, technological, legal and environmental factors.

Macau is aSpecial Administrative Region of the China. It was a Portugueseterritory until 1999 when it handed over the sovereignty of the landto People’s Republic of China. Despite the fact that Mainland Chinais not involved in the activities and welfare of Macau, it isresponsible for providing external defense of the region. Macau hasChinese troops who are stationed there permanently. The region ispolitically stable and business can carry out their activitiespeacefully within the country. The government recently announcedtheir plan of diversifying the economy, but there is no observablechange made so far. The government’s plan to diversify the region’seconomy may benefit the company since it will lead to economic growthof Macau. There have been minimal changes in the politicalenvironment, making it possible for Melco Crown to implement longterm strategic decisions without the fear of policy changes.

Macau lacks aneffective International transaction policy, monetary policy, andfiscal policy. Melco crown is, therefore, faced with a bit ofpolitical threat to its operations. The government also deregulatedthe gaming industry formal controls and most restrictions of thegaming industry were removed. Therefore, the limitations that couldhave restricted the operations of Melco Crown are absent and thus,can achieve its optimal productivity. However, deregulation candisadvantage the company due to unfair competition. The legal systemin Macau is not effective since it has been unable to address therate of corruption in the whole region and in gaming andentertainment sector. Such business environment is not healthy forthe company. Macau uses the legal system of China. There are permits,licenses and approvals that have been put in place to regulatebusiness environment in Macau.

According toWorld Bank, the GDP of Macau in 2014 was $55.5 billion. However, theGDP has been declining since 2014 as a result of anti-corruptioncampaigns that reduced the gaming revenue. According to Kevin S.(2015), the decline in GDP implies that Melco Crown’s revenue islikely to reduce this year and even in the future in case the trendmaintains. Macau is located at the center of some of the world’slargest economies such as China, Japan and South Korea. Therefore,the company has potentially large consumer base. Tourism is anothereconomic activity of Macau and has boosted the gaming andentertainment industry. Gaming and entertainment industry account forover 80% of the region’s economy. The over-dependence on gaming andtourism sectors is an important threat to businesses operating inthis region. Declining productivity of the gaming industry isindicated by the delays in some hotels and casino projects.

Macau is one ofthe freest economies in the world with a market freedom rating of70.1%. The high market freedom has attracted several investors whohave resulted to the economic development of the region. Macau wasranked the 4th richest region in the world by per capitaGDP in 2014. Higher income population is associated with highconsumption rate and therefore, creating an opportunity for MPEL toincrease its revenue. Macau has been experiencing a decline in theirinflation rate over the years. In April 2016, the inflation rate ofMacau was 3.02%. Pailwar, V. K. (2011) argues that the continueddecline in the inflation rate in Macau may slightly reduce theproductivity of Melco Crown. The interest rate of Macau is 0.75%. Alower interest rate is advantageous for Melco Crown since it showsthat credit is available and can be easily and cheaply acquired bythe company to fund its operations (Kevin S. 2015). The lowerinterest rates in Macau imply a lower cost of production andsubsequent higher profitability of the company (Kahn &amp Kotchen,2010).

Macau is also atthe center of technological advancement being at the proximity toJapan, China, Hong Kong and South Korea. The region has researchinstitutes and several research laboratories in many diverse areas.There have been industrial development and application of advancetechnology to improve efficiency, competitiveness of production,environmental protect and public health, and improvement of qualityof life. This has attracted investors in various industries includinggaming and entertainment sector. The establishment of the high-techSPIC Concordia Industrial Park in Macau has accounted for theeconomic growth of the region. Application of technology has beendone in almost all the economic sectors in Macau.

The region ischaracterized by an aging population. Macau has a population of599,203 people and a growth rate of 0.83%. The growing population ofMacau ensures sustainable labor force for the company. The populationhas a larger percentage of high income earners, but with a wideincome gap. The population is 100% urbanized therefore, Melco Crownhas potentially large domestic market and adequate labor force. Thenet migration rate of Macau is 3.4 migrants per 1000 people. Thehigher net migration is due to tourism, which creates an opportunityfor businesses in the gaming and entertainment industry. Macau,located across the Pearl River from Hong Kong, have beautifulsceneries along its coastline that as tourist attraction sites. Thereare adjacent islands that have also played an important role in thetourism sector. The size of Macau has been increased as a result ofreclamation of land from the sea. However, Macau lacks naturalresources such as forests.

Porter’s fiveforces

The Porter’sfive forces are used to analyze the competitiveness andattractiveness of Melco Macau in the gaming and entertainmentindustry. The five forces are threat of entry, supplier power,consumer power, threat of new substitutes and rivalry. The threat ofentry is moderate in the gaming and entertainment industry in Macau.Melco Macau has not lasted in the industry to an extent ofestablishing a stable market share and brand. Therefore, it is likelyto be affected by the entry of a relatively stronger competitor.However, the threat of entry is slightly reduced because in order foran entrant to obtain a competitive cost base in the industry, it mustinvolve considerable resources in terms of finance and experience.Melco Macau cannot be considered as a well-established company in thegaming and entertainment industry. Therefore, its cost advantages canbe attained by industry entrants. Melco Crown Entertainment Limiteddoes not have a more significant control over access to retailchannels and thus creating an opportunity for industry entrants.

The gaming andentertainment industry consists of significant number of suppliers.Therefore, the suppliers have a moderate bargaining power and havethreat of substitutes. There are no retailers that Melco Macaudepends on to sell their products and service they sell theirservices themselves. As a result, the supplier power is slightlyincreased because their net income is only dependent on the sales ofMelco Macau. The customers of the resort facilities operated by MelcoMacau are influenced by the quality the service and products offered.The customers in the gaming and entertainment industry have loyaltyand hence have a moderate power. The consumer power has been slightlyincreased over the last two years, due anti-corruption campaigns thatresult in reduced number of customers and tourists in the region.

The threat ofsubstitute products in the gaming and entertainment industry isrelatively low. However, the consumption of the industry services hasbeen reduced by the anti-corruption campaigns and the government’splan of economic diversification. Rivalry is the fifth force and italso affects the performance of a company. The gaming andentertainment industry has been experiencing growth over the yearsand have stiff competition. Therefore, Melco Macau is likely tobattle for market share with its competitors. The threat of rivalryis increased since the gaming and entertainment services have lessdifferentiation and limited switching cost for customers. Melco CrownEntertainment Limited operates in markets which consist of diversegroup of competitors regarding their origin, values and strategiesand therefore, increases the threat of rivalry. The company’slimited experience in the industry make it vulnerable to competitorsince they cannot effectively predict the direction of thecompetitive market.

Internalenvironment

The analysis ofthe internal environment of Melco Macau focuses on its value chain.Melco Macau has used merger and acquisition, and growing market asvalue chain management strategies. The primary activities of valuechain include logistics, operations, marketing and customermanagement. The logistics management in Melco Macau has the mandateof meeting the customer needs through effective and efficientmovement of the inputs and outputs within the company’s facilities.The company has inbound and outbound logistics management, andplanning. Operations layer is concerned with the conversion of theinputs into quality service and products that meets the demands ofthe customers.

Supportactivities of the value chain include infrastructure, humanresources, technology and development, procurement, and corporatesocial responsibility. Melco Macau has modern hotel and casino suchas the City of Dreams in Macau and City of Dreams Manila inPhilippines. These facilities have enhanced the services and thecustomer experience. The company is planning to construct new andmodern structures using advanced technology to enhance and expand itsoperations. The human resource provides talented, skilled andexperienced designers, artists, and developers who ensure mold theservices and products offered by the company meet the customerpreferences. Human resource has also contribution in the strategicdevelopments and expansion of the company’s operations inPhilippines.

Technologyenables the company to improve customer experience in their businesspremises. Corporate social responsibility is an important supportactivity especially in the casino and gaming industry which is likelyto conflict with the moral and ethical standards of the surroundingcommunity. The company has a working code of ethics to ensure that itmeets the ethical and environmental standards. The core competence ofMelco Macau is evident in the linkages between technology andoperations, technology and logistics, human resource and operations,and human resource and logistics. Through the core competence, MelcoCrown Entertainment Limited has been able to create competitiveadvantage that has enabled it operate profitably.

Conclusion

Melco CrownEntertainment Limited is still in the process of establishing itselfin the Macau’s gaming and entertainment industry. The companyenjoys a fairly favorable external environment that has enabled itreach its current position in the market and financially. Thepolitical, technological, legal and social environments createopportunities that the company can utilize to increase itsproductivity. However, the decline in the GDP and tourism sector is athreat to the productivity and sustainability of the company. Thelocation of the company creates an opportunity since it has severaltourist attraction sites such as the beaches and adjacent islands.The anti-corruption campaigns have led to reduced revenue of theindustry which contributes a large percentage of Macau’s economy.Macau’s over-dependence on gaming and tourism for its economy is athreat to business operation in the region. Therefore, the company’srevenue is likely to reduce for some period of time. Melco Macau mayexperience threats of entry and rivalry. Melco Crown has competitiveadvantage in its infrastructure, human resource and technology. Thecompany can utilize the competitive advantage to increase its marketshare and venture in potential overseas market.

References

Flood, R. P., &amp Rose, A. K. (2010). Inflation targeting andbusiness cycle synchronization.&nbspJournal of InternationalMoney and Finance,&nbsp29(4), 704-727

Hamilton, L., &amp Webster, P. (2015),&nbspThe internationalbusiness environment, Oxford University Press

Hunter J. &amp&nbsp Storz C. (2010), Institutional andTechnological Change in Japan`s Economy:&nbspPast andPresent, Routledge

Kahn, M. E., &amp Kotchen, M. J. (2010).&nbspEnvironmentalconcern and the business cycle: The chilling effect of recession&nbsp(No.w16241). National Bureau of Economic Research.

Kevin S. (2015), Security Analysis and Portfolio Management,Delhi : PHI Learning Private Limited

Macau Demographics Profile 2014, retrieved fromhttp://www.indexmundi.com/macau/demographics_profile.htmlon June 29, 2016

Macau Economy, retrieved fromhttp://data.worldbank.org/country/macao-sar-chinaon June 29, 2016

McIvor R. (2005) The Outsourcing Process: Strategies forEvaluation and Management, Cambridge University Press

Melco Crown Entertainment Limited 2015 Annual Report, retrieved fromhttp://media.corporate-ir.net/media_files/IROL/20/206322/2016/2015%20US%20annual%20report.pdfon June 29, 2016

Melco Crown Entertainment, retrieved fromhttp://www.melco-crown.com/eng/opportunities.phpon June 29, 2016

Pailwar, V. K. (2011).&nbspEconomic environment of business.S.l.: Prentice-Hall Of India Pv.

Appendix

Appendix 1: PESTEL

Appendix 2: Porter’s five forces

Appendix 3: Value Chain

Strength

Corporate social responsibility

Technology

Infrastructure

Human resource

Opportunity

Central location in the East Asia’s economic powers

Security

Political Stability

Deregulation

Overseas Market

Weaknesses

Inadequate experience

Limited overseas market

Threat

Declining GDP

Declining tourism

Threat of Rivalry

Competitor diversity

Over-dependence on tourism and gaming sector

Appendix 4: SWOT Analysis