Introduction

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

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

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

“The CEO of this organization believes in the value of HR andasked 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 talkingabout how HR

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

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

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

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

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

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

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

board of directors as a strategic thinker and someone withproven ability to

inspire and motivate staff. Lori knew from the interview withLowe 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 JohnReyes with

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

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

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

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

a full range of workout equipment, exercise classes, personaltrainers, an

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

investment was secured and R FC expanded rapidly from 1999 to2007, opening

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

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

million in net income. Figure 1.0 below provides the financialperformance of

RFC and its comparison to competitors.

By 2005, John Reyes had general managers overseeing each centerand had

gradually removed himself from day-to-day oversight of thecompany. He

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

encouraged hiring a CEO and other senior management team membersto

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

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

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

years’ experience in the fitness equipment industry; beforecoming to RFC

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

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

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

being micromanaged by Reyes, but he was given complete autonomyover

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

strategic leadership issues

The Fitness center industry

While the fitness center industry grew dramatically in the midto late 1990s

(more than 20 percent annually), overall industry growth hadslowed

considerably, as most towns now had two to three fitness centerswithin

close proximity.

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

enterprise. While some competitors (Day Spa and Constant Fitnessin

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

smaller fitness clubs or by opening new fitness centers, manyothers (including

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

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

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

although some consolidation may occur because certain marketshave been

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

Southeast (where RFC operates) is still growing and marketsaturation is not

anticipated for at least five years.

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

personal training and employ a large number of certifiedprofessional trainers

who work with members during club hours (typically 5-6am until10pm,

although the more body-building oriented gyms have recentlystarted offering

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

centers employ customer service representatives who can assistexisting members

with questions and also act as sales representatives, givingtours 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 withthe three-

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

growing the profitability of existing clubs by increasing memberenrollment and

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

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

acquisition by one of the larger fitness club chains at somepoint 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 businessstrategies, RFC’s strategy

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

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

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

enjoy fitness and social activities. RFC has deliberately chosennot to compete

with gyms that cater to body builders with large free weightworkout areas,

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

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

including cardio equipment; free weights and circuit trainingweight machines;

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

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

and other healthy snacks can be purchased. All RFC centers offerextensive

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

indoor basketball courts and TV lounges to appeal to the 10- to16-year-old

age group.

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

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

and projects. By that he means that they should consider howtheir jobs

contribute to RFC being able to provide a fitness clubexperience to couples and

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

with his senior management team and the board to understand howRFC

creates value for its customers, employees and investors. Thebusiness model

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

grow by recurring monthly member revenue (via new memberrecruitment and

existing member renewal) while maintaining relatively stablefixed costs and

low variable costs. Lowe has worked to identify both financialand nonfinancial

variables that drive RFC performance. By locating RFC fitnesscenters in upper-

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

RFC has been successful recruiting new members. Research datashows that

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

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

driver of member value.

RFC Strategic Challenges

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

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

club promotions to attract members. RFC experienced rapidrevenue growth

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

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

implementing operational efficiencies when he first came onboard at RFC,

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

customer retention problem. While a certain amount of turnoveris expected in

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

best industry data RFC can find relating to member retentionshows that their

member retention is approximately 20 percent lower than industryaverage.

An analysis of member records shows that members often joinduring a special

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

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

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

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

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

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

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

renew. Another concern is member feedback that RFC staff membersdo not

provide very good or excellent customer service. Lowe, seniormanagement, and

the board have had extensive discussions about the memberretention problem.

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

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

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

are all rated highly.

Lori thinks about these strategic issues and how HR might affectthem.

“There’s no question that problems with customer service andmember

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

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

and rewarded.”

Questions:

1. Identify and prioritize a set of tasks for Lori. Provide arationale for your prioritization. Link your responses to the keyconcepts 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 shedevelops the HR scorecard for RFC?

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

Thanks for your help!