Unit 2 Assignment

STRATEGIC HR MANAGEMENT
Student Workbook

Reyes Fitness Centers, Inc.:
The Strategic HR Opportunity

By John Sherlock, Ph.D.

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

This case study has been adapted from the original version of the case study found at
www.shrm.org. The submission instruction is the portion that has been adapted.

Project team

Project leader: John Sherlock, Ph.D.

Project contributor: Nancy A. Woolever, SPHR

External contributor: Sharon H. Leonard

Editor: Courtney J. Cornelius, copy editor

Design: Kellyn Lombardi, graphic designer

Production: Bonnie Claggett, production/traffic specialist

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

http://www.shrm.org/

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

Reyes Fitness Centers,
Inc.: The Strategic HR
Opportunity

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 students
the opportunity to deepen their understanding of
strategic HR management.

Learning O bjectives

Students completing this assignment will be able to:

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

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

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

4. Align HR deliverables with organizational strategy.

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

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.

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

RFC Background

Reyes Fitness Centers, Inc. was launched in May of 2009 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-2000s. 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 2009 to 2012, opening
approximately three new centers a year throughout the Southeast. By the end of
2012, 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 Societ y for Human Resource Management. John Sherlock, Ph.D. 5

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 Question:

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

By 2012, 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 2012, 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.

6 © 2008 Societ y 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 Michael Porter’s classic framework of various business strategies, (see
Michael Porter of Harvard University Five Forces research) 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 Societ y for Human Resource Management. John Sherlock, Ph.D. 7

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 2012. 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

8 © 2008 Societ y for Human Resource Management. John Sherlock, Ph.D.

john reyes
Chairman

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 2013 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.”

RFC Organizational Structure

The organizational chart for RFC is shown below in Figure 2.0.

Figure 2.0: RFC Organizational Chart – Management

RFC Board

mike Lowe
CEO

Pamela johnson
Vice President of Finance

jonathan Henley
Vice President of Fitness

Center Operations

alex garcia
Vice President of Sales

and Marketing

Lori Patrick
Director of HR

© 2008 Societ y for Human Resource Management. John Sherlock, Ph.D. 9

Figure 3.0: Organizational Chart – Human Resources Management

Human Resource D epartment

How Lori and the HR team are Regarded by Others at RFC
Jonathan Henley, Vice President of Fitness Center Operations:

“I feel that Lori is trying to do a good job here and appreciate that she’s seeking
to add strategic value. Each member of her team has been with RFC for more
than five years, which will help. Although Lori reports to me for performance
management purposes, her position is designed for her to work directly with
the CEO on people strategy issues. She does a great job keeping me informed
of the things she’s working on.”

Alex Garcia, Vice President of Sales and Marketing:

“HR is a tough job because employees are never satisfied. You can never pay
them enough and employee loyalty doesn’t exist anymore. Lori and her folks
do the best they can in administering the HR policies in a fair manner.”

Pamela Johnson, Vice President of Finance:

“I think Lori will do a very good job leading HR at RFC. She has a master’s in
the field and has been a quick study learning what RFC is all about. I think the
challenge as we pursue improving profitability at RFC is to look at all of our
costs—and HR’s budget may be affected.”

jonathan Henley
Vice President of Fitness

Center Operations

Lori Patrick
Director of HR

Susan Long
Recruiting Coordinator

Eric Robert
Mgr. of Compensation

and Benefits

Annette Smith
Mgr. of Training &

Development

10 © 2008 Societ y for Human Resource Management. John Sherlock, Ph.D.

The Strategic HR Opportunity

As Lori pulls into her driveway that night, she remembers how her conversation
with Mike Lowe ended. Lowe asked her about the HR department’s initiatives
for the coming two years. He specifically said that he expects the department’s
plan to be clearly linked to the organization’s strategic goals and to demonstrate
how accomplishment of those goals will be measured. Lowe was willing to
consider additional money for HR initiatives as long as a probable return on
investment could be shown. He requested that the goals be presented to him
and his senior management team in 45 days. “What an opportunity,” Lori
thinks as she walks into her house. She decides that creating an HR scorecard
(as described in the book, The HR Scorecard) is the best way to present HR’s
goals, because the scorecard development process will require her team to
identify how HR’s goals contribute to the organization’s goals.

Discussion Questions:

1) Identify and prioritize a set of tasks for Lori. Provide a rationale for your
prioritization. Link your responses to the key concepts in 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?

© 2008 Societ y for Human Resource Management. John Sherlock, Ph.D. 11

Background

This part of the case is a continuation of the strategic HR opportunity at RFC.
The case resumes with Lori Patrick, the HR director, back at the office the day
after being directed by Mike Lowe to develop a set of strategic HR initiatives to
help RFC achieve its strategic objectives.

Lori Convenes a Staff Meeting

“I appreciate you all taking time away from your other work to meet with me
today. Mike Lowe has presented our team with a very exciting opportunity. He
has asked us to develop over the next 45 days a set of strategic HR initiatives
that will help RFC achieve its strategic objectives.” Lori asks for general
reactions, and staff members express excitement about the opportunity. They
realize that a key to making RFC successful involves people issues, but express
anxiety about developing specific strategic objectives. “Won’t this make our
jobs more vulnerable if we don’t meet our objectives?” one member asked. Lori
responded, “CEOs everywhere are asking their departments to demonstrate how
they add value to the bottom line. We should develop objectives we think are
challenging but have a good likelihood of being met. If we do that and work
hard to achieve them, I think we can count on Mike giving us his full support
even if we don’t meet every single one.” Another team member said that she
was a member of SHRM and that there were member resources available to help
develop strategic HR objectives. Lori enthused, “Great. We’ll definitely want
to tap all the resources like this that we can. At lunch today, I’m picking up a
copy of The HR Scorecard for each of you. I t sh o ws h o w HR can add strategic
value to an organization and offers a process that we can use to develop a
scorecard to identify, manage and measure strategic HR initiatives that will drive
or enable successful implementation of an organization’s strategy.”

12 © 2008 Societ y for Human Resource Management. John Sherlock, Ph.D.

Lori continued, “We have measured HR activities in our department for a long time, such
as cost per hire, time to fill a position, number of employees trained, etc. But to add
strategic value, we must shift our focus to measure outcomes, not activities. Further,
those outcomes must add essential value to RFC’s ability to execute its strategy and meet
it objectives. Our first planning meeting will be this Thursday at 9 a.m. I’m well aware
that 45 days is not much time. I want to meet with each one of you over the next couple of
days and talk about how you can to contribute and how we will manage things so that
other responsibilities don’t suffer.”

Discussion Questions:

1) If you were one of the employees in Lori’s meeting, what questions and concerns
would you have?

2) What other messages do you think are important for Lori to relay to her staff?

HR’s Strategic Role and Scorecard Development

The HR Scorecard outlines a seven-step process to implement HR’s strategic role in an
organization.

The HR Scorecard: Seven-Step Process

1. Clearly define the business strategy.

2. Build a business case for HR as a strategic asset.

3. Create a strategy map.

4. Identify HR deliverables within the strategy map.

5. Align the HR architecture with HR deliverables.

6. Design the strategic measurement system (HR scorecard).

7. Implement management by measurement.

Lori uses this process because she knows that what she is trying to achieve goes beyond
presenting an HR scorecard but is, in fact, the beginning of repositioning HR into a
strategic role at RFC.

She starts by meeting with her formal supervisor, Jonathan Henley, vice
president of fitness center operations. Lowe had briefed Henley on what he has
requested of Lori; Henley offers to help Lori in any way he can, but notes that
HR is far more her expertise than his. Henley spends considerable time traveling
to fitness centers and working with club managers to ensure the facilities stay
clean and safe, and that the equipment is in working . Henley suggests that
Lori discuss her strategic HR initiatives with Pam Johnson, vice president of
finance, because her department’s support is critical to Lori’s success. Lori takes
that advice and meets with Johnson and her staff several times over the 45 days.
Her meeting with Alex Garcia, the vice president of sales and marketing, goes
really well. Garcia’s focus is to have his team bring in new members through
advertising and special promotions. The incentive compensation program for his
sales representatives has been an excellent motivation tool. There have been only
a few months in the last 36 when monthly sales goals were not reached.
Lori learns from senior management that there is general agreement that

© 2008 Societ y for Human Resource Management. John Sherlock, Ph.D. 13

RFC’s strategy has shifted from revenue growth through club expansion to
profit building through member retention and cost management. While cost
management is important, RFC is not opposed to spending money if the
dollars are an investment in something that will have a positive return (more
than break-even) and is clearly linked to RFC strategy. In regard to member
retention, it seems to Lori that while everyone knows member retention is
important, no one is clear about their specific role in retaining members.

Lori and her HR team members hold a series of focus groups to collect
qualitative data on what the staff knows about RFC’s strategy and their role
in it. The comments gathered indicate that staff members are generally unaware
of what the strategy is, other than to make money; and further, that employees
are unclear how they specifically contribute to the organization’s strategy.
Lori knows from her experience that this is not uncommon. The HR Scorecard
stresses that the business strategy must be very descriptive so that employees
understand their role in the plan and so that they can measure the success
of the strategy. She raises this point in her weekly update meetings with Mike
Lowe, and he agrees that communication about the organization’s strategy
must improve.

For the second step in the process, Lori finds that building the business case
for HR as a strategic asset is easier than she expected. In her meetings with the
vice presidents, she shared various articles from SHRM and material from The
HR Scorecard and found that they understood that RFC had nothing different

14 © 2008 Societ y for Human Resource Management. John Sherlock, Ph.D.

interaction with staff
during workouts

Leading Indicators

member workouts
at center per week

Leading Indicators

in terms of weight training equipment, etc., from any other gym in town—it
is the employees serving the members that make the difference. Finance had
already worked up a financial scenario about how profits would improve with
various increases in member retention. Lori plans to use these numbers to
demonstrate how HR can support RFC’s retention strategy by helping to build a
team trained and motivated to provide great service to members—and deliver
member renewals.

For the third step, Lori works with Mike Lowe on the following graphic (see
Figure 4.0) to show how RFC creates value—and ultimately, profit. While this
value map will likely be expanded, it provides a good pictorial for managers and
employees to better understand RFC strategy.

Figure 4.0 – RFC Strategy Map

RFC Strategy Map: How RFC Creates Value

member satisfaction

member renewal
Lagging Indicator

increased Profits
Strategic Impact

Discussion Questions:

1) Explain the difference between a leading and lagging indicator.

2) What other potential leading indicators exist in this case?

For the fourth step, Lori and her team spend considerable time discussing the
RFC strategy and the organizational goals Mike Lowe had established:

Have a minimum of 50 percent of adult members visit an RFC center two times

per week (currently only 35%).

Have 90 percent member satisfaction with RFC staff interactions (no formal
data collected, but anecdotal data suggests it’s well below that now).

Improve profitability by a minimum of 10 percent annually.

© 2008 Societ y for Human Resource Management. John Sherlock, Ph.D. 15

Continue to achieve new member goals at current rate.

Improve the annual member retention rate to 75 percent (currently 62%).

Some of the key questions posed in The HR Scorecard related to this step include,
“How would employees need to behave to ensure that the company achieves
these goals?” and “Is the HR function providing the company with the
employee competencies and behaviors necessary to achieve these objectives? If
not, what needs to change?”

In terms of HR deliverables, it becomes clear to Lori that there needs to be
better alignment of the performance management system with RFC’s strategic
plan. Currently, performance goals are focused on job description activities
instead of on results that contribute to RFC’s goals.

As for member retention, Lori thought that HR needed to ensure that staff
assigned primary responsibility for retention knew it, and that they had adequate
customer service skills and training. While there was a need for an individual in
management to have primary responsibility for leading retention efforts, Lori
felt that HR should make sure that all RFC employees saw member retention
as part of their jobs as well. All managers should incorporate retention activities
and goals into employees’ annual performance plans. Lori recognized that her
team and senior management must work to build a culture where excellent
customer service is seen as an absolute priority and a core value. Lori decided to
present this culture change to senior management as a multi-year initiative.

Finally, Lori knew that the compensation system should be analyzed to see if
an incentive program would be effective to focus performance not only on
member retention efforts but on profitability as well. Lori was aware of other
organizations which had successfully implemented profit-sharing programs
linked to achievement of strategic objectives, and she thought it might work well
at RFC. Lori would need to work closely with Pam Johnson and her finance
team to conduct a cost-benefit analysis of any proposed incentive program.

Discussion Question:

1) What other HR practices/systems might Lori consider in developing a

comprehensive HR scorecard?

For the fifth step, Lori evaluated how best to align the HR architecture with
the HR deliverables her team was considering. Lori and her team thought about
how the components within the HR system fit together (internal alignment) as
well as how the HR system aligned with (i.e., supported) the RFC’s external
strategy components. While Lori felt her HR department’s organizational

16 © 2008 Societ y for Human Resource Management. John Sherlock, Ph.D.

structure was aligned well with the RFC strategy, she felt certain job functions
should change to focus behaviors toward the HR deliverables identified in the
fourth step.

For the sixth step, Lori and her team reviewed the deliverables that had been
developed within the strategy map and identified the following preliminary HR
scorecard measures (Figure 5.0).

Figure 5.0: rFc Hr scorecard

strategic
objective

specific, measureable goal (Hr
deliverable)

Hr
scorecard
progress

Have a minimum of
50 percent of adult
members visit an
RFC center two
times per week .

Align the performance management
system to clarify skills and behaviors
required to increase member visit
frequency by _______.

Have 90 percent
member satisfaction
with RFC staff
interactions.

Create and execute a customer service
training program with 95 percent of staff
completing training with satisfactory
competency rating by _______.

Improve profitability
by a minimum of 10
percent annually.

Initiate a culture-building program by
_______. Once implemented, achieve
90 …