Human Resources

overview

This case describes a growing mid-size U.S. company in the Southeast in the fitness club industry. The recently hired HR director is given the opportunity by the organization’s CEO to propose HR initiatives to help the business meet its strategic goals. The case gives HR students the opportunity to deepen their understanding of strategic HR management. The case is divided into Parts A & B to allow flexibility of covering the case either one part at a time or in its entirety, depending on the content and schedule of a course.

Learning objectives

Students completing this exercise and class discussion of the case will be able to:

Demonstrate basic business acumen in terms of organizational finance, 1. strategy planning and execution.

Understand the 2. philosophy behind developing an HR scorecard and its link to strategic human resource management.

Understand the 3. process used to develop an HR scorecard.

Align HR deliverables with organizational strategy.4.

“Sell” the HR scorecard concept(s) internally.5.

text

Becker, B.E., Huselid, M.A., & Ulrich, D. (2001). The HR scorecard: Linking people, strategy, and performance. Boston: Harvard Business School Press.

2 © 2008 Society for Human Resource Management. John Sherlock, Ph.D.

Part a

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. (RFC) 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 RFC 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.

© 2008 Society for Human Resource Management. John Sherlock, Ph.D. 3

Figure 1.0 – 2007 rFc and regional competitor Financial Performance (numbers rounded)

rFc o’malley’s Fitness center

constant Fitness

muscle mania

Hard body gyms

day spa

Gross revenue $51M $25M $120M $45M $35M $164M

Total expenses (including taxes, interest, depreciation)

$50M $24.75M $119M $43.5M $34M $163M

Net income $1M $250K $1M $1.5M $1M $1M

Employees 900 450 1,100 825 750 2,100

Financial performance trends 2004-2007

Flat annual net income.

Flat annual net income.

Decreased annual net income due to expansion.

5% annual growth in net income.

5% annual growth in net income.

Decreased annual net income due to acquisitions.

discussion Questions:

1) From the table above, what are three observations about RFC’s financial performance relative to their competition?

2) Explain how net income is determined for each of the companies in the table.

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.

4 © 2008 Society for Human Resource Management. John Sherlock, Ph.D.

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

© 2008 Society for Human Resource Management. John Sherlock, Ph.D. 5

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