Question

Introduction

Lori Patrick’s conversation earlier that day with Mike Lowe, the company’s

CEO, kept running through Lori’s head during her 45-minute rush-hour

commute home. “What a great opportunity Mike’s given me,” she thought.

“The CEO of this organization believes in the value of HR and asked me to

tell him how HR can help the company meet its strategic goals. When I was

studying for my master’s in HR, we kept reading and talking about how HR

needs to position itself as a strategic business partner; but I didn’t think I

would get the opportunity so soon in my career.” Lori had been the director

of Human Resources with Reyes Fitness Centers, Inc. (R FC) for only a couple

of months. She had been attracted to the position in part because it offered her

first opportunity to oversee all of HR, and because of her interview with Mike

Lowe. Lowe was fairly new to the company (just less than two years) and was

highly regarded by the founder and chairman, John Reyes, and the rest of the

board of directors as a strategic thinker and someone with proven ability to

inspire and motivate staff. Lori knew from the interview with Lowe that when

he said employees were the key to RFC’s future, he meant it.

RFC background

Reyes Fitness Centers, Inc. was launched in May of 1999 by John Reyes with

$150,000 of his own funding and some investment capital from three college

friends from the University of North Carolina, Chapel Hill, where they were

business majors attending the university in the mid-1990s. The first center

was located in Raleigh, NC, and was an immediate success. The center offered

a full range of workout equipment, exercise classes, personal trainers, an

outdoor pool, on-site daycare, and even a small restaurant. Additional private

investment was secured and R FC expanded rapidly from 1999 to 2007, opening

approximately three new centers a year throughout the Southeast. By the end of

2007, RFC operated 28 fitness centers, grossing $51 million in revenues and $1

million in net income. Figure 1.0 below provides the financial performance of

RFC and its comparison to competitors.

By 2005, John Reyes had general managers overseeing each center and had

gradually removed himself from day-to-day oversight of the company. He

had become interested in other business ventures and, as a result, his board

encouraged hiring a CEO and other senior management team members to

oversee the growing enterprise. He hired 48-year-old Mike Lowe as the

new CEO of RFC in late 2005, and Reyes assumed the role of chairman.

This CEO position was the second in Lowe’s career. He had more than 20

years’ experience in the fitness equipment industry; before coming to RFC

he had been the CEO of a smaller fitness center company in California that

had been acquired. Lowe’s transition as CEO had gone quite well in Reyes’,

the board’s and in Lowe’s view. Lowe had been somewhat concerned about

being micromanaged by Reyes, but he was given complete autonomy over

the operations of the company and was expected to involve the board only in

strategic leadership issues

The Fitness center industry

While the fitness center industry grew dramatically in the mid to late 1990s

(more than 20 percent annually), overall industry growth had slowed

considerably, as most towns now had two to three fitness centers within

close proximity.

As shown in Figure 1.0, RFC is considered a medium-sized fitness center

enterprise. While some competitors (Day Spa and Constant Fitness in

particular) continue to focus on large-scale, either through acquisitions of

smaller fitness clubs or by opening new fitness centers, many others (including

RFC) have reduced the number of new clubs being opened.

There is as much emphasis on health and recreation as ever in the U.S. Industry

reports suggest that the outlook for fitness centers in general is quite positive,

although some consolidation may occur because certain markets have been

saturated with too many clubs to remain profitable. However, the market in the

Southeast (where RFC operates) is still growing and market saturation is not

anticipated for at least five years.

Fitness centers hire a variety of professional and support staff. Some focus on

personal training and employ a large number of certified professional trainers

who work with members during club hours (typically 5-6am until 10pm,

although the more body-building oriented gyms have recently started offering

24-hour service). In addition to housekeeping and front desk staff, fitness

centers employ customer service representatives who can assist existing members

with questions and also act as sales representatives, giving tours of the facility to

prospective members.

RFC strategy

During Lowe’s tenure, RFC opened just one new fitness center (just outside

of Atlanta, GA). This modest club expansion is consistent with the three-

year financial strategy the RFC board has agreed on, where the focus is on

growing the profitability of existing clubs by increasing member enrollment and

retention. The company is privately held by a small group of investors and the

board wants it to stay that way. The board has discussed positioning itself for

acquisition by one of the larger fitness club chains at some point in the future. It

is agreed that improving the bottom-line (i.e., net income) performance of RFC

will only help in this regard.

Within Porter’s classic framework of various business strategies, RFC’s strategy

most closely aligns with Porter’s “focus” strategy, where a company focuses

on serving the needs of a particular market segment to achieve a competitive

advantage. RFC has positioned itself as a place where the whole family can

enjoy fitness and social activities. RFC has deliberately chosen not to compete

with gyms that cater to body builders with large free weight workout areas,

24-hour access, onsite training supplement sales, and “no-frills” amenities.

RFC’s strategy is to attract families by offering a wide variety of fitness offerings

including cardio equipment; free weights and circuit training weight machines;

personal training; and exercise classes (such as Pilates, yoga, stationary cycling,

etc.). Most RFC fitness centers have a snack bar where nutritional smoothies

and other healthy snacks can be purchased. All RFC centers offer extensive

locker room facilities and on-site daycare. Newer RFC fitness centers have small

indoor basketball courts and TV lounges to appeal to the 10- to 16-year-old

age group.

From his first day on the job, Lowe has stressed to the staff that he wants them

to be strategic in how they approach their daily, weekly, and annual activities

and projects. By that he means that they should consider how their jobs

contribute to RFC being able to provide a fitness club experience to couples and

families that is superior to any of the competition. He has worked diligently

with his senior management team and the board to understand how RFC

creates value for its customers, employees and investors. The business model

for how fitness centers make money is fairly straightforward: profitable firms

grow by recurring monthly member revenue (via new member recruitment and

existing member renewal) while maintaining relatively stable fixed costs and

low variable costs. Lowe has worked to identify both financial and nonfinancial

variables that drive RFC performance. By locating RFC fitness centers in upper-

middle-class locations and focusing marketing efforts on couples and families,

RFC has been successful recruiting new members. Research data shows that

members typically do not have issues with the RFC monthly dues. Member

feedback indicates that having a friendly place for the whole family to stay fit is a

driver of member value.

RFC Strategic Challenges

As with most start-ups, the early strategy for RFC focused on growing

revenue. They did this by opening several clubs each year and offering new

club promotions to attract members. RFC experienced rapid revenue growth

(more than 20 percent annually) through 2004. However, several of the RFC

centers are not reaching their profit goals. Mike Lowe tried to address this by

implementing operational efficiencies when he first came on board at RFC,

but he soon realized that the profit challenges were driven in large part by a

customer retention problem. While a certain amount of turnover is expected in

the industry (due to competing clubs, families moving out of the area, etc.), the

best industry data RFC can find relating to member retention shows that their

member retention is approximately 20 percent lower than industry average.

An analysis of member records shows that members often join during a special

promotion (where the initiation fee is waived) but then rarely use the center

and fail to renew. A telephone survey of members (lapsed and current) reveals

that “non-use” was one of the reasons for members not renewing or stating

they were unlikely to renew. An analysis of member-visit frequency shows that

more than 50 percent of members in 2006 hadn’t even visited their RFC fitness

center two times per week. The hypothesis is that members who aren’t going

to their RFC fitness center frequently are far less likely to see sufficient value to

renew. Another concern is member feedback that RFC staff members do not

provide very good or excellent customer service. Lowe, senior management, and

the board have had extensive discussions about the member retention problem.

While part of Lowe’s strategy to increase profits is to enroll more members in

existing fitness centers, those profits will be short-lived if members stay only one

year. Data also shows that membership cost, quality of offerings, amenities, etc.,

are all rated highly.

Lori thinks about these strategic issues and how HR might affect them.

“There’s no question that problems with customer service and member

retention come down to people issues. It is affected by the type of people we

bring on board, how they’re trained and how their performance is managed

and rewarded.”

Questions:

1. Identify and prioritize a set of tasks for Lori. Provide a rationale for your prioritization. Link your responses to the key concepts to one of the examples in the The HR Scorecard.

2. Based on your understanding of RFC and its business strategy, how can HR add strategic value to RFC?

3. What challenges do you anticipate Lori will encounter as she develops the HR scorecard for RFC?

4. Anticipate potential outcomes for the plan that is proposed for RFC?

Thanks for your help!

Answer 1

1. Lori's task as a HR was to look into many personnel related matters which could effect the survival of RFC.

• Lori needs to work out ways to retain old members with RFC and also make sure there are new members added.
• Training staff ( enhancing staff/ employee satisfaction) to be more cooperative, empathetic and supportive with existing members and provide better cutomer service.
• Work on issue of high prices compared to other fitness clubs.
• Reducing membership charges which are on a higher side compared to other competitors

2. RFC's central business strategy is "FOCUS" on members/ customers where they have provided exceptional servicesto the members giving them a whole new experience of fitness with family - Giving them facilities like daycare,snackbar, and variety of other options.

keeping the present stratergy as it is they need to bring in similar facilities for their internal customers (employees)

• Better pay
• Employee decision making / involment programes and like wise.

3. Lori is going to face many problems during the formulation of scorecard

• There needs to be a gradual change in employee retaintation and motivation programes.
• Training the employees to be better then what they are presently.
• Pricing decisions need to be done in comparison to industry and similar competitors.
• Finanacial problems would be in terms of how to maximize profit and sales while keeping the cost low.
• Earning loyalty of members for a life time. Providing better services  for members whilst keeping prices low and providing better service from the staff.