Analysis of LivingWell Inc. Strategic Approach to Environmental Factors - Essay Example

Running Header: Strategic Options Strategic Reponses & Strategic Options Analysis of LivingWell Inc. Strategic Approach to Environmental FactorsName: Collage Name: Word count of Report – 2,935 (Not including references, table of content and three appendices) Strategic Reponses & Strategic Options Analysis of LivingWell Inc. Strategic Approach to Environmental Factors In today’s intensely competitive world, organisations are increasingly pressured to achieve targets and goals with limited and scarce economic resources. Effective deployment of organisational strategy directs the scare resources and efforts towards a charted course, eliminating waste arising from lack of direction (Andrews 1986). In crafting organisational strategies, the impinging internal and external environment factors needs to be analysed. The report analyse the strategic approach taken by LivingWell Inc. the UK based operator of fitness and health center chain, in responding to the environmental factors influencing the industry. Report further evaluates the alternative or additional strategic options available for adaptation to ensure surviving and thriving in to the next decade. Organisational Background LivingWell Inc., which is a part of the Hilton Group Plc., operates over 85 clubs in UK and owning 9 international outlets in Australia, Germany, Brazil, Turkey and Malta. Its UK membership is in the region of 150,000 and the 9 international clubs have a membership of 15,000. The LivingWell markets its services under three sub brands, The LivingWell Premier, LivingWell Health Clubs and LivingWell Express. In addition to these health and fitness centres, the Living Well has also broaden its operational domain by offering hair and beauty care through it’s 26 “The Sensory” saloons. LivingWell is among the top 3 companies operating in the Health & Fitness Club market in UK Visions and Mission An organisational mission and vision are the foundation upon which effective strategies can be formulated. (Kaplan & Norton 2001). “A strategically revealing mission statement incorporates three elements. These include “what”, “who” and “how” referring to the needs, customer groups and process of delivery (Abell 1980). LivingWells is mission statement aims “To help our members enjoy the healthier lifestyle they deserve”. In a bid to provide a clear and defined organisational vision, LivingWell launched its new vision statement “Personalised fitness for life” in May 2005 (Hilton Group Plc. 2005). Key Objectives Setting objectives is one of the most important aspects of strategic management process and involves translation of the Mission and Vision in to quantifiable and actionable performance targets. Below is an outline of key objectives in the 5-year plan of LivingWell. Increase ratio of operational profits to Sales Revenue to 15% from its current 12% Increase market share from 6% to 15% in terms of membership. Widen International Presence to 30 countries from the current 14 Gear up the e-commerce interface Achieve indisputable number one position in customer care Manage costs through streamlined processes Develop a high performing Human Resource base Increase company revenue from its current £50 million to £80 million by 2010 with over 30% contribution targeted from overseas operations. SWOT Analysis A SWOT analysis should be used in drawing conclusions on how a company can best align its resource base to take advantage of the business opportunities while safeguarding against the threats. It should also be used in developing those weakness areas by strengthening the internal deficiencies and building required core competencies (Duncan, Ginter & Swayne 1998). Strengths Brand recognition and high brand reputation backed by Hilton Groups association. Financial Strength of the company, which allows for aggressive expansions. The recent commitment of £ 100 million capital investments for LivingWell Plc. by the Hilton Group is an example of the strong financial position of the company. The company is also generating up to 12% of operational profits, which is another sign of the financial stability of the organization. Alliances with Hilton Hotel Chain providing access to a target segment catered by LivingWell Express. The potential for expansion of LivingWell Express Clubs to many overseas countries is also present as Hilton Hotels are operating in most of the countries around the globe. Host of value added benefits as the in-house Medical Checkup services and the “Sensory” Saloons, which make the LivingWell Product offer, unique from the rest of the competition. Weaknesses Low number of members per club if compared to competitors such as David Lloyds which has 57 clubs but 320,000 members, which is double the membership of LivingWell with a lesser number of clubs. Low operational profit percentages, which reduce the ROI. Opportunities Massive Market potential for growth as only 6% of total UK population is currently holding health club membership. 50% or more of UK population indicating interest in joining a fitness and health club at a future point of time (Mintel 2003). Those who indicated interest does not only represent the young age groups but over 50’s age categories with higher levels of disposable income. The increased global trend towards fitness and health where people in many of the developing countries and newly developed countries are exhibiting marked interest in lifestyles associated with health & Fitness. Increased free trade and relaxation of cross national investment requirements under relaxed Foreign Direct Investment policies, allowing companies such as LivingWell to invest in the overseas. Prospects of developing corporate memberships with the increasing focus the companies are placing on personal and fitness developing of employees. Increasing importance placed upon appearances by societies across the world, fueled by the transnational and global media exposure to the concept of “Thin is beautiful” where fitness clubs are sought as a means to weight loss. Threats Threat of competition is very high with aggressive players as Holms Place and Next Generation expanding at rapid phase. Threat of substitutes in the form of weight loss pills, commercialized dietary plans and home exercise equipments. Though the market grew at a phase of 75-80% in value term during the 1990s the industry growth has stagnated over the last years restricting domestic growth. With the high standards of benchmarking for ambiance and venue, customer expectations have risen, reflecting in the large investment requirements in the range of £12-15 million per club. Environmental Analysis A company needs to be aware of and understand the influencing factors in the macro environment, so that strategies being developed will fit well with the environmental conditions. (Thomson & Strickland 2003, p. 74). Below PESTLE Analysis evaluates the macro environmental conditions of Health & Fitness Industry in UK. Being an international company, Political factors’ impinging up on the company is of global nature. The prevailing world terrorism is a threat for any non-Muslim country and the recent attacks on British subways was an example. Bombing of KFC fast food outlet in Karachi- Pakistan goes to indicate the anti-US and European sentiments in some countries instigated by the terrorist groups and such risks should be considered when choosing new locations for opening LivingWell clubs. Politically, some of the closed economies in the 1980’s have opened up and adopted the open economic policies and allowing foreign direct investments. Such countries as, India, China and Russia offer massive markets, which can be considered for new investments. Environmental factors need to be taken in to consideration when setting up sites, which should comply strictly with local authorities and environmental authorities. However, the industry does not bear any major impact on the environment as may be in the case of heavy manufacturing industries. Environmental aspects of foreign countries such as restrictions of new buildings within preserved building zones such as in the case of many European countries may have implications. Social factors such as the changing life styles; yuppie culture placing greater importance upon smart appearances; older generations with high disposal income and interest in living healthy; may all contribute to the industry’s potential. With the hectic life styles and changing role of women and mothers, more and more families are consuming fast food, which is leading to weight problems. While one segment of the clientele of health and fitness centers are attending them as a part of their healthy lifestyle, some are attending fitness clubs to counter the weight problems arising from their unhealthy eating habits. Technological factors such as improved fitness equipment, heart rate monitors, commercialized dietary plans such as Atkins plan have all revolutionized the concept of health and fitness. More and more people expect quick results from their fitness programs, which is the promise most of the home excise equipments, diet plans and diet pills are giving. Such technologies may have to be incorporated in to the Fitness Club offers as options for those wanting to see faster results. Legislature – In UK, VAT is charged on membership fees, increasing the cost to consumers. However the recently passed licensing laws for sale of liquor means that the club will have to refrain from serving liquor and having to apply for individual licenses for special occasions and social functions. Legislatures differ in different countries and as LivingWell is interested in expanding operations globally, pertaining legislature, which affects the business, should be evaluated prior hand. Economic factors as the decreased rate of economic growth from its 3.1% in 2004 to 2.5% expected in 2005 and 2006 as per trend up to March 2005 will impact upon the overall level of business prospects. The pressure on pricing will mount with the moderation of consumer growth spending from its previous year 3% to 2% in 2005 and 2006 (Selfin & Shah 2005). Industry Overview The UK Health and Fitness Industry is currently in its growth stage of the Business Life Cycle, and approximately 7,200 private clubs are in operation with over 2.6 million members. In value terms the business of private clubs is worth over £2.2 billion per annum. The 11 main club chains account for almost 700 clubs. The health club membership of 2.6 million represents a mere 6% of the total UK population indicating large growth potential (Mintel 2003). Industry’s dominant players have expanded through mergers and acquisitions as well as alliances with complementary businesses. Industry profitability has reduced over the years with the pressure on prices mounting with the proliferation of private clubs offering cheaper prices. Capital intensity too has increased as expected standards of the clubs have increased. An industry analysis through the application of Porter’s Five Force model is provided in Appendix I Competitor Analysis To a firm to compete effectively, it should have a comprehensive knowledge of its competitors. Competitor information such as the capacity, current scale of business, market share, product and price offer as well as other strategic activities should be monitored. Annexure II, provides a summary of details on main players in the private health & fitness sector in UK. LivingWell is placed the 7th in terms of membership figures though the 3rd in terms of number of Clubs which may reflect unutilised capacity having adverse effects on the profitability of the company. Compared to competition, LivingWell has positioned itself as a modern and exclusive club at affordable price. Strategic Response to Current Environment LivingWell has adopted a series of corporate, business and functional level strategies in response to the business environment in which it operates. Company has adopted a Differentiated approach in pursuing a competitive advantage. The three different sub brands aims to offer differentiated marketing offer to the targeted segments. Other optional Generic strategies include cost leadership or focus approach. In adopting a cost leadership position, the process and product is simplified and streamlines to the level, which allows for optimised costs, and lowest price offers. Companies such as South West Air Lines in Dallas USA have developed an undisputed competitive advantage through their cost leadership strategies (Armstrong & Kotler 2000, pp 400- 402). Companies, which adopt focus strategies, choose market segments, which are underserved or over served by those larger companies. To maximise profitability of these niche markets, company should either use cost focus or a product focus. Esporta is a good example in the UK fitness industry, which takes the focus approach and target the affluent niche segment that requires star class services and ambiance. While pursuing a differentiated generic strategy, LivingWell has responded to the market situation with a host of corporate and business level strategies which stream down to their functional level strategies. Appendix III illustrates how the corporate and business strategies of LivingWell integrate for effectiveness based on a strategy integration model of Thomson & Strickland. LivingWell has responded to the static growth in the UK economy and the Health & Fitness sector by making strategic moves to invest and expand in other countries. The expansions in to beauty and hare care segment through operating Sensory saloons adds value to the company offer and also generates additional business and allows representation in the broader business domain of Health, Beauty care and Leisure segments. The company has revamped its online services as a part of its strategic initiative to gear up the e-commerce interface (e-consultancy.com 2000). In its responses to conditions in the political environment, LivingWell lobbied against the levy of VAT on health club memberships. In a bid to upgrade its technology, it has chosen Precor, the world-renowned US fitness equipments as their key supplier. One of the proactive strategic moves of the company is the LivingWell Medical, which provided in-house medical advisory services to its members. Its affiliations with Hilton Hotel chain provide the company with a strategic advantage in tapping on to the affluent traveling clientele. At its functional level strategies, the company has launched its drive to develop the Human Resource base through a host of attractive reward systems, and branding its recruitment and selection process by launching its employment website www.iamofftolivingwell in year 2004. In response to growing social awareness of harmful effects of smoking, LivingWell Clubs have declared their garden areas as no Smoking Zones (LivingWell.com 2005). The 7-day free trial offer is an effective functional marketing strategy, prompting trial. Strategic Options for future Organisations must base its strategy formulation on a strategic architecture, a concept formed by Gary Hamel & C K Pralahad who describe strategic architecture as the essential link between today and tomorrow and involving the identification of what strategic responses a company has to be making today, to intercept the customer needs in the future (Hamel & Pralahad 1994, pp 107-126). Thus, LivingWell needs to consider alternative and optional strategies, which can be utilised in surviving and thriving in the future. LivingWell is already positioned as an upscale club but have promoted itself to many market segments. This image may have contributed to alienating potential customers with lower disposable income levels. The club has a marked weakness in having up to 40% excess capacity, which needs to be utilised in order to, achieve company’s long-term objectives of increasing Gross Profit Margins to 15% from its current 12%. In order to do this, it may well serve the company to adopt a Best Cost approach. Best-Cost approach allows a company to offer differentiated and high quality products but at value for money rates. This is in effect what Toyota offered with its Lexus model to compete with the brands like BMW and Mercedes Benz. This strategy may allow the company to attract a higher rate of membership, which will contribute to reduced cost per member where overhead costs of the clubs are concerned. Strategic Alliances and mergers are also available options. This strategy can be utilised in furthering the LivingWell’s objective of establishing business presence in 30 foreign markets. Existing operations in chosen foreign countries can be acquired and remodeled and re-launched as LivingWell operations. The presence of Hilton Hotels worldwide can also be tapped on to more aggressively by opening LivingWell Express clubs within prospective hotels. The company should target to own the first mover advantage which some of the markets can offer. The company should also consider the performance of its existing clubs and those, which operate below 40% capacity, should be given deadlines for improved performance and if proved incapable of increasing membership levels should be considered for divestments. Another strategic option is to consolidate on the Beauty care sector by developing the “Sensory” chain and incorporating own brand products which can be outsourced from contract suppliers. With the Hilton hotel chain also requiring large volumes of personal care products as shampoo, bath gels, creams and lotions, the development of a high quality own brand under Sensory name may pay off in the long-term. Strategic alliances can be considered with a reputed personal care and grooming manufacturers. Leveraging on IT is also a strategy, which the company can utilise, providing consumers and customers alike with value added services. The website should incorporate health and nutritional guides, medical tips and other related information for the benefit of any visitor to the site. The Clubs should continue to add value to its members by offering to plan and host social gatherings and quality banquette facilities should be developed. The strategic choices, which the company can choose upon, are many but the choice should be made in relation to the market and environmental conditions, which are dynamic and needs to be responded to with altered and modified set of strategies at different times. Conclusion In conclusion, it can be noted that LivingWell has responded to business conditions prevailing and anticipated, through a mixture of corporate, business and functional level strategies. The company with its strong financial backing of the Hilton Group Inc. is in a strong position to benefit from attractive industry opportunities. The Health, Fitness and Leisure industry, which may have slowed down in general in the UK, is still at its developing stages across the world and there is significant for growth. The company should continue with those strategies, which are proven effective while considering the deployment of alternative strategic options to retain and develop its competitive positioning in the industry. 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Retrieved November 14, 2005, from http://www.bl.uk/collections/business/healt Selfin, Y. & Shah, S. (2005) UK Economic Prospects, UK Economic Outlook March 2005, Price WaterHouse Coopers. Retrieved November 13, 2005, from http://www.pwcglobal.com/uk/eng/ins-sol/publ/ukoutlook/PwC- EconomicOutlook_March2005. Thomson, A. A. Jr. & Strikland, A. J. (2003). Strategic Management Concepts and Cases. 13th ed. New York: McGraw-Hill Publishing Company Ltd. The health club market. (d.n.). AboutHealthclubs.co.uk. Retrieved November 14, 2005, from http://www.abouthealthclubs.co.uk/health_club_market.html Appendix I Application of Porter’s Five-Force Analysis on the Industry Industry Force Factor Health & Fitness Industry Analysis Bargaining Power of Buyers This is low, as the buyer base is fragmented. Large corporate clients may be more demanding than the individuals, pressurizing for better corporate package rates. Bargaining Power of Suppliers This is Low as there is little or no power in the hands of suppliers as many reputed firms are competing for supplying equipments. Threat of new entrants – This is High and there has been a proliferation of new entrants to the industry in the last 5 years, which has eroded the profitability through downward price pressure. Although large-scale clubs may be capital intensive, setting up small-scale units is within small business entrepreneur’s capacity. Rivalry among competing sellers This is High and as such the profitability has decreased over the years. Promotional offers and price reductions has contributed to intensely competitive industry scenario. Appendix II Table 1 – Competitor details of Private Health & Fitness Clubs in UK # Fitness Center Operators Number of Clubs Membership Market Share % 1 David Lloyds 57 320,000 12% 2 Fitness First 112 275,000 11% 3 Holmes Place 60 230,000 9% 4 Spirit Health Club 123 230,000 9% 5 LA Fitness 67 200,000 8% 6 Esporta 46 220,000 8% 7 Living Well 85 160,000 6% 8 Canons 52 165,000 6% 9 Virgin Active 18 85,000 3% 10 Dragon Health Clubs 22 85,000 3% 11 Next Generation 15 85,000 3% 12 Other 545,000 21% Total Private Health Clubs 7200 2,600,000 100% Appendix –III Figure 1 – Integration of Business and Functional Level Strategies at LivingWell Inc. Read More