The Strategies Used By Fitness First To Build and Sustain Competitive Advantage - Essay Example

Analysis and evaluation of the strategies used by Fitness First to build and sustain competitive advantage ABSTRACT Fitness First is currently positioned in its industry associated with lower pricing. Established in 1993, this organisation has grown significantly through pricing strategies that outperform or are generically more attractive to consumers both price-sensitive and those looking for more value for their money. Whilst other competition position on quality, reputation or innovation, Fitness First has gained positive ground by appealing to the budgetary needs of its many target consumers. Fitness First maintains many weaknesses, most of which are related to marketing and promotional development, lack of a cohesive organisational culture, and an inability to remove supplier and buyer power in the market. Fitness First maintained losses in 2010 and 2011, indicating a problem with operational costs that continue to outpace revenue production. As such, in this highly competitive industry, marketing becomes a critical function for the company if it is to be sustainable into the future. Despite these weaknesses, strengths associated with proper celebrity endorsements and effective diversification of existing products and services to extend the life cycle of its offerings tend to offset some of the aforementioned weaknesses. It is recommended that Fitness First conduct ample market research to align service and product with changing consumer needs, work to build a more mission-focused organisational culture, and improve marketing prowess with more investment in promotion as a key competitive strategy (brand-building emphasis). TABLE OF CONTENTS 1.0 Introduction........................................................................................................... 2.0 Industry analysis.................................................................................................... 2.1 Porter’s Five Forces Analysis.................................................................... 2.2 Threat of substitutes................................................................................... 2.3 Supplier and consumer buyer power.......................................................... 2.4 Competitive rivalry and threat of new entrants.......................................... 2.5 Threats and opportunities for Fitness First................................................. 3.0 Resource-based view of Fitness First..................................................................... 3.1 The VRIO framework................................................................................ 3.2 Value chain analysis................................................................................... 3.3 An overall assessment of strengths and weaknesses.................................. 3.4 Industry factors assisting in sustainability of life cycle.............................. 3.5 Specific generic strategy employed by Fitness First.................................. 4.0 Opportunities for business improvement................................................................ 4.1 Effective utilisation of promotion............................................................... 4.2 Collecting market research.......................................................................... 4.3 A new organisational culture model............................................................ 5.0 Conclusion............................................................................................................... References Fitness First 1.0 Introduction Fitness First was launched in 1993 as a single, stand-alone gym in Bournemouth. Through a series of investments, acquisitions and business model improvements, Fitness First has grown quickly to become one of the largest health club centres in the world. The privately-owned company now boasts over one million members in over 400 Fitness First clubs spread across the globe (Fitness First 2012). Fitness First maintains 150 of its clubs in the United Kingdom alone, with significant revenues stemming from the Australian market, which makes up 31 percent of total business revenues (Fitness First 2010). Asia provides 16 percent of revenues and Germany 20 percent of total membership-related sales (Fitness First 2010). To maintain sustainable business operations in these regions, the business must consider elements of local and international culture (i.e. human behaviour and the social condition) in order to gain competitive advantage over its many domestic and foreign rival businesses. Fitness First offers a vast variety of differentiated products and services that have been designed with a customer-centric approach and also to maintain a unique brand personality and reputation in its operating regions. Without diverse approaches to service creation and product innovation development, Fitness First would be hard-pressed to maintain its current position as a revenues leader in the UK and abroad. It is the company’s approaches to marketing, service and product development, and aesthetics (the servicescape) that makes Fitness First stand out over small and large-scale competition. It should be noted that Fitness First, as a non-public business entity, does not produce similar market and financial reports as that of companies trading common and preferred stock. This is due to the fact that Fitness First does not have to satisfy shareholder demands for reporting compliance or attract independent venture capitalists or other private investors. This conflicts understanding of the company’s many strategic directions and developments as revealing this data could jeopardise many competitive advantages in a market where products and services can be easily replicated by competitive forces. 2.0 Industry analysis The health club industry is a highly competitive and saturated marketplace, especially in the United Kingdom, Australia and Asia. Fitness First competes with Virgin Active (part of the Virgin Group led by Richard Branson) which is rapidly becoming one of the largest health clubs in the worlds achieved through recent acquisitions by Virgin Group (Kollewe 2010). Virgin Active has achieved a 15 percent growth in total business revenues, provided by the 187 different clubs now owned by Virgin Active (Kollewe 2010). Virgin Active maintains presence in Italy, South Africa, the United Kingdom, Portugal, Australia and Namibia, thus providing considerable real-time competitive force for Fitness First and impacts potential expansion plans for Fitness First as Virgin Active has considerable first mover advantages in developing nations. Why is this critical for Fitness First? Kalyanaram and Gurumurthy (2008) iterate that when a product or service is able to provide consumers with acceptable perceptions of quality service delivery, consumers will gain more favourable opinion about the first mover and, subsequently, develop negative assessments about later entrants. This is why Virgin Active maintains such a dominant competitive threat to the organisation, as Virgin Active has a very well-established brand created by years of marketing and brand-building experience by the parent Virgin Group. Using Richard Branson as a recurring celebrity endorsers has brought this competitor significant competitive advantages through marketing prowess. Other competition in this market include 24 Hour Fitness Worldwide, Esporta Limited, and Whitbread PLC (Hoovers 2013). The presence of these competitors is diverse, including the UK and many other European and Asian markets. Each of these competitors maintains differentiated products and services and aesthetic models that are geared toward the market characteristics (e.g. lifestyle, behavioural or social) of important target markets. There is other, smaller-scale, privately-owned competition spread throughout the markets in which Fitness First operates. Intensity of competitive rivalry is significant for this business. 2.1 Porter’s Five Forces Analysis Michael Porter (2011) developed a framework by which to analyse the industry conditions and potential threats to a business. These include threats of new entrants, threats of substitutes in the market, competitive rivalry, and the bargaining power of both suppliers and consumers. All of these factors influence the success or failure of Fitness First in all of its operating markets. 2.2 Threat of substitutes According to macroeconomic theory, once there are more substitutes available on the market, demand becomes more elastic since consumers now have more choice (Boyes and Melvin 2005). For Fitness First, substitutes include personal trainers with independent or corporate-sponsored presence in the market. People who are forced to pay varying gym memberships can allocate these financial resources toward more personalised fitness and health services. There are a whopping volume of retailers, additionally, that provide financeable or direct purchase fitness products that provide a more private, at-home experience. Price reductions or effective promotional financing agreements in the retail gym product market drive more incentive to consumers to consider avoidance of the membership concept and provide themselves with at-home fitness opportunities. 2.3 Supplier and consumer buyer power Fitness First does not maintain a great deal of leveraging power in the supply market. The majority of assets include treadmills, modern weight systems, and a variety of other tangible fitness products. This encompasses the majority of supply needs for this particular business model. In a B2B retail business environment where there are considerable volumes of potential vendors for these products, the switching costs for suppliers to defect to other buyers is considerably low. However, this is the dynamic of the asset supply chain for Fitness First (and other competition) which cannot give the business advantages in cost reduction for supply. The diversity of supply options rather than a wholly-managed consolidated supply system for this industry impacts budget and operational efficiency. Consumers have significant buying power in this industry. With many different options other than Fitness First, each competitor maintaining their own unique pricing structures and promotions, the switching costs for consumers are also very low. There is always the risk that consumers will find more value or better service and product provision with competition and simply cancel their membership in favour of a competing fitness centre. This is an industry where competitive presence, both large and small, conflicts being able to establish multiple market brand loyalty with significant revamping and restructuring of services and products, which is a costly strategic effort. 2.4 Competitive rivalry and threat of new entrants This is an industry where products and services can be easily replicated by competition if they maintain the adequate cash or credit capital, or funding through public common stock offerings. It was previously established that competitive rivalry in this industry is intensive. The only non-replicable asset that a business maintains in an industry where replication is commonplace is the company’s brand reputation (Nandan 2005). Many companies, acting much like large competitors in an oligopolistic market, use promotions as a the most fundamental and primary means to gain consumer attention and build loyalty. Each major competitor, such as Virgin Active, maintains competitive pricing structures and offer short- and long-term promotional incentives to attract new market opportunities. In an environment where promotional strategy serves as a predictor for revenue growth, Fitness First must be ever-aware of the competitive pricing strategies in promotional incentives in place and then react accordingly. Fortunately, there is little risk in terms of new entrants. This is due to the fact that the start-up costs are significant as it pertains to asset procurement (DC Strategy 2012). The high volume of retailers in multiple domestic and international markets also serves as an entry barrier to new market entrants as this provides ample risk for a company that maintains no brand recognition upon market entry. Additionally, presence of specialty centres for health and fitness, such as health juice bars and yoga centres, act as significant deterrents for market entry. As such, Fitness First maintains opportunities to attempt to outperform existing competition without much consideration of new brands attempting to seize market share. 2.5 Threats and opportunities for Fitness First In recent years, Fitness First has been subjected to negative publicity for a variety of its operational and service-oriented problems perceived by important markets. There have been complaints, especially from the Australian market, about staff being overly aggressive in their selling tactics (Ramachandran and Jensen 2008). Additionally, members have had historical problems trying to cancel their existing memberships, with First Fitness allegedly pushing back with excuses as to why these memberships should endure and, consequently, failing to stop automatic deductions from credit or debit accounts of consumers (Ramachandran and Jensen 2008). There is always the risk of negative publicity, with the word-of-mouth potential of social media and also media coverage of negative consumer sentiment, which place danger in establishing a positive brand reputation. This does, however, provide opportunities for the business to develop its customer relationship management program to better handle these risks. Boulding (1993) identified a strong connection between service excellence and willingness to repurchase and recommend a brand to others. Fitness First can develop a more powerful presence on social media, develop online chat support opportunities to better service and manage customer complaints, and also develop internal organisational culture focused around ethical business practices to use this to generate more public support for its emphasis on corporate social responsibility. Organisations that maintain an ethical climate and culture have fewer problems to contend with as it relates to CSR and are more equipped to effectively cope with negative consumer sentiment (Bartels et al. 1998). Additionally, many companies in multiple industries have begun utilising social media, a low cost opportunity to build transparency and service improvement into a business model, which is another opportunity for Fitness First to maintain advantages in CSR and better service modelling. 3.0 Resource-based view of Fitness First A company cannot successfully compete, expand or innovate until it understands what tangible and intangible resources will provide opportunities to improve the business model and its associated brand. This includes tangible assets, human capital advantages, strengths in human resources, and many other operationally-related assets. Fitness First maintains many powerful resources that are aligned with strategic intention that can provide the business with more clout in the competitive marketplace. 3.1 The VRIO Framework In terms of value, Fitness First maintains resource strengths that can exploit opportunities whilst also neutralising competitive threats in its operating territories. The first is culture change, which serves to not only reduce some level of consumer buying power in the market and some level of threats of substitutes. The business has ample human capital experience in providing diversity of service, with many tacit knowledge holders dispersed throughout the operational model. For instance, the firm has launched its BodyFirst and Group Fitness strategies, specialty customised service offerings dealing with weight management and personal training. Successful provision of these services, running concurrently with traditional self-service gym services, requires facilitation and coordination by members throughout the organisational model. Value is created by having staff and organisational culture that can be responsive to concurrent utilisation of two different business models (i.e. self-service and customer-focused). Furthermore, diversity of service offerings give the business more credibility with desired target markets as the business adjusts its service culture. Having more services and products that are supplementary to the traditional self-service model removes threats of substitutes by attracting new markets that demand customised service delivery that could have been found in competition, such as yoga centres or even major weight management programs such as Weight Watchers. Rarity is a major consideration for Fitness First and appears to be a fundamental weakness of the business model. Research did not uncover any referred instances of a unified and cohesive organisational culture that is driven by a shared vision or mission. In many business models where decentralised decision-making is required to maintain competitive advantage and generate new ideas for innovations, establishing a reiterated vision and mission builds a more effective leadership team and, subsequently, organisational culture (Fairholm 2009). Strategies and objectives of Fitness First do not appear to be transparent throughout the organisational model. If the health club devoted more into vision and mission as an internal cultural dimension, it would provide much more strategic value for human capital development and responsiveness to changing consumer sentiment and attitude about service delivery. Under its current operational model, imitability is a major consideration and liability for the business. The assets utilised are rather homogenous in this industry with many competitors able to procure appropriate treadmills, weight systems and other self-service assets. Furthermore, many other health clubs have also developed customised supplementary services such as personal training and weight management programs, which can be low-cost and not labour-intensive in this industry. Research did not indicate any existing or developing programs in the Fitness First operational or strategic models that are substantially innovative for this business, thus there is always risk of replication of all service offerings and products; a fundamental weakness in terms of competitive advantage for this company. The specific compensatory models that are used to incentivise and create employee motivation are not published by Fitness First, thus conflicting the process of understanding holistic value of its organisational human capital advantages. Without proper organisation, businesses are constantly at risk of competitive disadvantage (Barney and Hesterly 2011). Fitness First maintains a generic, centralised hierarchy in-store and in the governance team that is homogenous to most fitness centres in this industry, thus providing no significant competitive advantages as found in models that have more shared decision-making for innovation development. Again, this is a significant weakness to the business model. 3.2 Value chain analysis Research did not indicate specific supply and distribution advantages or, generically, the structures of procurement utilised by this largely self-service company model. Figure 1 illustrates opportunities for improvement and focus in important value chain categories that could improve the long-term competitive advantages of Fitness First. Figure 1: Value Chain Analysis – Specific Improvement Opportunities 3.3 An overall assessment of strengths and weaknesses As previously identified, since it is not advantageous for Fitness First to openly publicise its many strategic developments and intentions, as well as what drives potential competitive advantage related to its value chain, it is difficult to determine where competitive strengths lie in terms of cost, brand development, or internal operations and management. However, the aforementioned recognition that consumers have had historical difficulty with service management issues, there is clearly a need for more human resources capability development and also utilisation of marketing to improve service. Fitness First, though maintaining considerable brand recognition for its years of operations in countries such as Australia and the United Kingdom, lacks in differentiation prowess to establish unique and rare (non-imitable) service and product offerings and then further translate these advantages into new promotional strategy designed to incentivise membership growth in key target markets. 3.4 Industry factors assisting in sustainability of life cycle Sustaining a product or service’s life cycle is imperative for a business. When a product or service has reached the decline stage, it has considerable negative disadvantages for a firm. Dooley (2005) identifies that inventory management becomes a cost burden, abandonment timing becomes a risk, and general cash management is conflicted. Fitness First maintains recognisable capabilities in understanding how to extend the product and service life cycle by making incremental changes to how services and products are delivered and performed. For instance, the company’s BodyFirst program designed to foster better consumer health through exercise and diet has gone through evolutions that now include an online weight management model, thus injecting convenience for the consumer. It appears that Fitness First executives and managers understand the necessity of assessing total consumer demand and then making innovative adjustments to change the engagement principles of how consumers interact and appreciate service and product philosophy. For instance, the business recently launched its Lose Big program which is a targeted, customised weight loss program, structured like a boot camp, for those that have significant weight loss problems. This was developed in partnership with the television program The Biggest Loser Asia that brought much product placement opportunities in marketing that assists in building a more positive brand personality and improving brand recall in new markets. Growth in healthy foods consumption serves as an consumer-generated industry factor that forces strategic changes to product and service. For instance, Whole Foods market, an organic and health eating retailer, has experienced substantial increases in demand and sales volumes at an average of 30 percent since 2001 (Charles 2009). This indicates a growing cultural and lifestyle trend. Fitness First is capitalising on these health-eating and dieting trends domestically and internationally that sustains product and service life cycles, therefore giving the business a cost advantage over competition unable to inject innovations into existing service and product models and therefore facing risks of cash management and inventory control. 3.5 Specific generic strategy employed by Fitness First Research indicates qualitative evidence that Fitness First is utilising a best cost provider strategy as its most effective competitive tool. This is a strategy to give consumers better value for their spending by providing better products and services at a lower cost than competitors. This strategy is to ensure, at least, comparability in service and product variety with the best achievable price structures (Thompson, Gamble and Strickland 2008). Fitness First incentivises its target markets by offering initial low-cost membership, generally at £9.99 with an evolution after the first month to £40 to £80 depending on the scope and quality of services demanded by the consumer. Not all competitors can sustain these lower prices, especially with injection of new service and product changes, with mounting overhead, rising costs in the supply chain, and regional inflation rates related to the host country currency and economic conditions. This price-focused strategy has considerable advantages for Fitness First considering the many aforementioned weaknesses in the business model that do not necessarily give the firm rarity or non-imitability. Using pricing, therefore, is a quality positioning strategy against competition that offer similar products and services and where differentiation is exceedingly difficult without dramatic cost absorptions for premium asset accumulation. 4.0 Opportunities for business improvement Having identified that strengths and weaknesses of the Fitness First business model, as well as industry factors that influence strategic growth, revenue increases, and service modelling, recommendations for improving Fitness First’s competitive position can be offered. 4.1 Effective utilisation of promotion There is a plethora of respected and trusted marketing models and theorist perspectives on the importance of utilising a brand as the most powerful strategic element of a business model. Zhang and Chan (2009) describe how brands that are able to provide legitimate or perceived opportunities for self-expansion can more easily achieve creating attachments to the brand which, in turn, evolves into vital brand loyalty. Muniz and O’Guinn (2001) support these notions, suggesting that brands facilitating self-expansion have more opportunities for positive word-of-mouth and willingness to defend the brand against any potential negative comments and sentiments stemming from the social condition. Why is this critical for Fitness First in gaining competitive advantage? It was previously identified that the business maintains weaknesses associated with brand-building and differentiating through effective positioning and other marketing strategies. Currently, the business is positioned with pricing, which is not wholly ineffective, however the business should be devoting more capital to the promotional function. Clearly, changes in lifestyle and healthy eating habits have been driving higher demand for healthy food products and gym memberships in the UK and abroad. However, at the same time, the homogenous nature of products and services in the health club industry make it difficult to infuse innovations that will provide meaningful brand-building opportunities and gain more market interest. In 2010 and 2011, Fitness First had losses that were largely due to high operational costs (Fitness First 2011). This was not offset by revenue production. Additionally, the company’s liabilities were much higher than total assets, which suggest a potential liquidity problem with the firm. Since the company is unable to attract new markets to offset high operational costs and the costs of borrowing identified in the firm’s 2011 annual report, promotional prowess and new developments for positioning and differentiation should be considered. Recently, Fitness First recruited its first renowned celebrity endorser, Mel B of the Spice Girls and the wife of David Beckham, to represent a special fitness program with the company. The business should be recruiting domestic and international celebrities as this has significant opportunities for creating linkages between desired lifestyle characteristics and the social order that are important in this industry that is driven by trends. Celebrity endorsements that provide three constructs gain the most advantages for the promoter, these include attractiveness, expertise, and trustworthiness (Ohanian 1990). In the case of Fitness First, Mel B represents the health and exercise competency required to make this an attractive and lifestyle-relevant endorser as well as the brand of husband David Beckham engaged in sporting activities. Fitness First should seek out potential endorsers that share lifestyle traits or have respected authority in the UK and abroad that would be considered viable promotional opportunities. Though there are costs incurred in these recruitments, the ability of endorsers to provide more market interest and gain new market attention is supported by research as a significant potential revenue builder. Rather than segmenting via demographic trends, the business should be utilising a more behavioural approach (which is also aligned with the recommended celebrity endorsement strategy). Referred to as psychographics, aligning lifestyle and attitude with marketing function, Fitness First can link its service and products with what is currently valued with desired target markets and then translate this into effective integrated marketing communications and advertisements. Research did not uncover any notable advertising concepts or supporting industry literature that identified Fitness First’s focus on using promotion to gain more market share. Because the business is now diversifying its product and service models, there should be more effective psychographic-based promotions occurring to give the business competitive advantage. It would have supplementary benefits such as establishing further barriers to new market entry by potential competitors and raising the switching costs to consumers for brand defection to competition. Using this strategy, the business does not have to remove its pricing focus that gives it a price leader advantage, rather illustrating how Fitness First understands what consumers genuinely value could help to position it as a quality and service-minded leader that translates to many markets into increased value. 4.2 Collecting market research Fitness First should also be gathering qualitative and quantitative research into what is driving real-time consumer characteristics, purchasing decision-making, and the generic social condition to determine how the business can effectively change services and products. There is not much opportunity for immediate growth in this highly saturated industry, with experts identifying only a one percent growth rate in 2006 (Algar 2008). There must be a rationale for why later growth rates have been relatively static which is something that should be identified by Fitness First so that the firm can develop new products and services, or generic internal strategies, to be more responsive to consumer needs. It was previously established that consumers have low switching costs for defection to a competing brand, which poses significant risk to an industry where growth is difficult to achieve through traditional business methodologies. It is, therefore, recommended that Fitness First utilise surveys, questionnaires or even focus groups as a means of engaging more effectively with the social needs of markets and how lifestyle translates into their intention to buy health club memberships. Fitness First just recently expanded its international presence to include 24 new facilities in the Middle East (AME Info 2012). However, these stand-alone facilities require significant capital investment and credit to establish and maintain, which is only going to increase its already higher-than-industry-average operational costs. When operating in the UK, the Middle East and in Asia (not inclusive of other markets) the consumer-generated rationale for why memberships are considered vital differ and are largely culturally related. If Fitness First gains important information, it can strengthen the marketing function, human resources function, and perhaps even distribution and supply along the value chain to gain better competitive advantages. For instance, if qualitative research indicates a desire for premium health juice and health food products, the business can revamp operations to include a new supply strategy and a new method of providing value through in-house product offerings aligned with cultural demands. Market research will indicate not only consumer attitudes and sentiments about individual competing brands and the industry homogenously, it will provide new strategic planning opportunities for infusing differentiation into the business model by changing service and product modelling. 4.3 A new organisational culture model In order to have the appropriate capacity for flexibility in the operational model, Fitness First should be developing a cohesive, ethical and mission-focused organisational culture. This would involve decentralising the existing model to provide opportunities for a transformational leadership model, one that promotes followership through role modelling desired behaviours and motivating through training and development. As previously noted, research did not uncover any instances of this flexibility in the model, just a standardised top-down hierarchy that disseminates decision-making and information downward rather than horizontally. In the United States, for instance, 24 Hour Fitness has establishments that operate around the clock, thus positioning under convenience and gaining more mass market appeal for those who do not maintain standard professional or lifestyle hours. If the business wanted to benchmark the successes of this powerful brand in the U.S., it would require a culture that remains focused on mission, which is convenience in this case with more motivation to embrace this dynamic of flexible and responsive culture development. Human capital advantages in this industry that is highly service-focused would translate into better word-of-mouth, repurchase intention, and finding overall value through enhancement of service dimensions and delivery. It is recommended that the business work with organisational consultants to identify needs and strengths to change the dynamics of culture from centralised to decentralised as a means of providing a larger basket of ideas for innovation developments and change practices aligned with changing consumer needs in many domestic and foreign markets. 5.0 Conclusion If Fitness First maintained shareholders, it is likely the business would promote more of its internal and external strategies as a means of attracting investment. However, for the privately-owned firm, this has many disadvantages in eroding potential competitive advantages in an industry where replication of products and services is not difficult. Strengths of the business were identified as diversifying its service and product models, maintaining a price leader position, use of the online model for convenience purposes associated with consumer needs, and reducing risks of substitutes in the industry by establishing barriers through diversification of product and service offerings. If Fitness First follows the recommendations provided, the company will achieve more effective competitive advantages. In its current position, the business cannot afford to have its operational costs offset gains in revenue, especially when changing pricing toward a more premium model could be upsetting to consumers that are price-sensitive and demand value for their membership expenditures. References Algar, R. (2008). The State of the UK Health/Fitness Industry, Oxygen Consulting. [online] Available at: http://www.oxygen-consulting.co.uk/docs/state-of-the-uk-health-fitness-industry.pdf (accessed 28 February 2013). AME Info. (2012). 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