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Scale and Differentiation in Services: Using Information Technologies to Manage Customer Experiences at Harrah’s Entertainment and Other Companies by Vikram Mansharamani Submitted to the Alfred P. Sloan School of Management on January 11, 2007 in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy. ABSTRACT This dissertation is focused on the topic of service innovation and explores economies of scale and strategic differentiation in services via an inductive field-based case study of the world’s largest casino gaming company, Harrah’s Entertainment. It includes comparisons to services firms in other industries such as distribution/logistics (UPS) and for-profit/online education (Apollo Group/University of Phoenix). The findings suggest that scale and differentiation (considered by many to be mutually exclusive in services) can be combined through the strategic use of information technology in a manner that increases customer switching costs, resulting in improved profitability and returns. The limitations of standardization-only scale-oriented strategies are discussed, and the dissertation concludes with a description of the three key components needed by any firm seeking to employ a strategy of scalable service differentiation: (1) a loyalty program, or other means of linking specific transaction data with specific customers, (2) an analytic engine that determines the ranking/prioritization of customers and the criteria upon which to differentiate services, and (3) a set of information technology tools that automate consistent differentiated service delivery across a company’s touch-points with its customers. Thesis Supervisor: Michael A. Cusumano Title: Sloan Management Review Distinguished Professor of Management Mansharamani Page 2 ACKNOWLEDGMENTS This dissertation would not have been possible without the love, support, and encouragement of my wife, Kristen Hanisch Mansharamani, and the not-so-subtle vocal encouragement (at all hours of the day and night) from my newborn daughter Victoria (“Tori”). Kristen tirelessly read through multiple drafts, tolerated hundreds of hours of discussion about obscure academic theories, and endured my frequent trips to conduct field research. Words cannot express my gratitude. Tori, meanwhile, provided enough of a distraction to keep me sane—yet also made it crystal clear that dirty diapers are a higher priority than a computer. The extraordinary managers working at Harrah’s Entertainment also deserve acknowledgement for their selfless participation in this research. The team of professionals with whom I interacted at Harrah’s is among the finest group of managers I have met in my decade of business experience. Three particular executives deserve special recognition for having truly enabled both the enterprise as well as this research – Tim Stanley (Chief Information Officer), Chris Chang (Director, Information Technology), and Gary Loveman (Chief Executive Officer). Tim and Chris were always readily available and facilitated virtually all aspects of my access to the organization. My work would not have been possible without their assistance. This research began with Gary Loveman and his early “blessing” of it. Without his support for this endeavor, it seems unlikely that I would have been able to gain the insights I acquired through the field research conducted at Harrah’s Entertainment. While it is impossible to be exhaustive in my acknowledgements, I would like to specifically thank the following Harrah’s managers who actively provided significant amounts of their time to this research: Gary Loveman, Tim Stanley, Chris Chang, Mike Effner, Mary Dossett, Sandeep Khera, Sunny Tara, Jason Pashko, Ken Weil, David Norton, Steven Pinchuk, Mansharamani Page 3 Joseph Flippen, Patti Lee, Greg Gamsky, Marc Oppenheimer, George Dittmann, Katrina Lane, Sherri Pucci, John Bruns, Melissa Price, Gerry Tuthill, Don Marrandino, Karin Matthews, Walter Coffey, and Jay Snowden. I would also like to thank my dissertation committee (Professors Michael Cusumano and Gabriel Bitran of the MIT Sloan School of Management and Professor Harvey Sapolsky of the MIT Securities Studies Program) for their extremely valuable guidance and help in crafting this research: I am particularly grateful to Professor Cusumano for tolerating multiple drafts and generously donating his time to a seemingly endless effort. A final individual at MIT who proved quite influential and helpful is David Verrill, Executive Director for the Center for Digital Business @ MIT. David’s invitation to the Center’s events and consistent support of my efforts did not go unnoticed. One of the spectacular benefits of attending graduate school in the greater Boston area is that one receives tremendous access to leading academics at MIT’s peer institutions. My work, and the ideas discussed in this dissertation, benefited a great deal from numerous discussions “across the river.” In particular, I want to thank Harvard Business School Professors Amy Edmondson, Lee Fleming, Karim Lakhani, Stefan Thomke, and Michael Tushman for their time, energy, enthusiasm, and support of my efforts. I especially want to thank Professor Tushman for generously spending an entire semester with me working through an independent study of the innovation literature. Other Harvard professors who indirectly influenced this research include Martin Feldstein and Max Bazerman, both of whom accepted me into their doctoral seminars. Finally, I thank the National Science Foundation for sponsoring a portion of my graduate research through its Graduate Research Fellowship Program. I was honored to have received the NSF’s support. Mansharamani Page 4 Table of Contents ABSTRACT................................................................................................................................... 2 ACKNOWLEDGMENTS ............................................................................................................ 3 TABLE OF GRAPHS................................................................................................................... 9 TABLE OF FIGURES................................................................................................................ 10 TABLE OF TABLES.................................................................................................................. 11 PREFACE.................................................................................................................................... 12 CHAPTER 1 – INTRODUCTION............................................................................................ 15 STRATEGY & FIRM PERFORMANCE ........................................................................................................16 ARE “DIFFERENTIATED SERVICE” AND “SCALABLE” BUSINESS MODELS INCOMPATIBLE?..................19 THE DISSERTATION FOCUS: SCALABLE SERVICE DIFFERENTIATION.....................................................23 HARRAH’S ENTERTAINMENT AS A SERVICE INNOVATOR ......................................................................24 SCALABLE SERVICE DIFFERENTIATION IN ACTION ................................................................................28 AN OVERVIEW OF THE DISSERTATION: BRIEF CHAPTER SUMMARIES...................................................35 CHAPTER 2 – A REVIEW OF THE EXISTING LITERATURE ....................................... 39 HOW DO SERVICES AND PRODUCTS DIFFER?..........................................................................................44 Intangibility ...................................................................................................................................................49 Simultaneity & Perishability .........................................................................................................................50 Heterogeneity ................................................................................................................................................52 Non-Consensus Attributes of Services...........................................................................................................53 Customer as Participant......................................................................................................................................... 53 Labor and Capital Intensity ................................................................................................................................... 54 Co-Location........................................................................................................................................................... 55 Customization........................................................................................................................................................ 55 Cultural Specificity................................................................................................................................................ 56 Summary: What are Services and How Do They Differ From Products?.....................................................57 HOW THE SERVICE TRAITS AFFECT THE MANAGEMENT AND STRATEGY OF FIRMS .............................58 Implications of Intangibility ..........................................................................................................................58 Implications of Simultaneity / Perishability ..................................................................................................61 Implications of Heterogeneity .......................................................................................................................64

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