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An American fitness club, Bally Total Fitness, operates sixty gyms in several states of the US. In the late 2011, L.A Fitness, which is a competitor, took over 171 operations of former Bally’s locations. In mid-2012 the fitness club chain sold extra thirty nine facilities to Blast Fitness. Nonetheless, at its peak in 2007, before the filing of the Chapter 11 bankruptcies, the fitness chain operated approximately 440 facilities based in 29 states, Canada, Mexico, China, the Caribbean and Korea under the Crunch Fitness, Bally Total Fitness, Pinnacle Fitness, Gorilla Sports, Canada brand Sports Clubs and Bally Sports Clubs. The fitness club chain is headquartered in Chicago, Illinois.

Overview of the case

The case underscores the challenges faced by the fitness club chain with regard to membership, pricing and general strategies. This is evidenced based on the fact that since  late 2002, the company has revisited its strategies with regard to its exceptional approach to pricing, boosted clubs’ managements accountability for profitability, selling club memberships, launched new method to assist members of the club lose weight, varied its marketing message and started to reinforce its internal control systems (p. 1). The case enumerates reasons that make Americans drift fitness clubs: a desire to lose weight, to meet people, to get in shape or just to reduce stress (p. 2).  Amongst the core facilities, at the club were aerobics and weight machines. The case highlights that the mix of activities at the club, though, changed over time as the customers’ preferences also changed. In addition, the clubs had different formats like owner operated clubs, franchised clubs, health spas and design, and management companies. Clubs as well charged members an enrolment fee as well as a monthly subscription fee. The competitors of Bally Total fitness are YMCA, 24 hour Fitness, Gold’s Gym and Curves International.

Internal Analysis

Strengths

The company has other sources of incomes apart from the gym membership. Some of these sources emanate from personal trainers in activities like Pilates training, elliptical motion trainers and yoga. It has an image that is recognized nationally. This is well brought out from the case that since 2003 the company has been the largest publicly traded health care club in the United States with about 360 outlets added to about 50 outlets traded on the international market. In addition, the company has over 3.6 million members (p.7). In fact, if in the United States there are about 51 states and the company had about 360 outlets, this means that the company had about seven outlets in every state; this is sufficient to make its services known. Apart from its pricing strategy and a wide range of portfolio, the company initiated a pay-as-you-go membership plan which enabled members to pay on every visit paid to the facilities.  

Weakness

Though faintly mentioned in the case, the company has high overhead costs due to its wide range of portfolio and outlets. This range of outlets also necessitates the company to hire many employees, which increases the costs as well. Precisely, the company employed about 24,000 employees by the fall of 2004 (p. 8). The last but most important aspect that brought the company under scrutiny, the company had been employing fraudulent accounting practices. These faulty practices saw its internal auditors resign from the company in 2004 (p. 9).

Opportunities

Since the company has previously been focused on high end segment via its large sized gyms, it now has the opportunity to venture into the small sized studio type gyms as a way of tapping into low end customer segment. In fact, its pay-as-you-go strategy would be more efficient in this type of segment. This will, as well, give it the chance to update the brand image, something that is likely to make it roll back to its former position in the industry. The company should as well
target children as they are the ones being affected by weight problems in the US (Organisation for Economic Co-operation and Development, p. 50).

Threats

It is undeniable that anything that deals with cash at times is not permanent, the company is bound to lose members with pay-as-you go, especially in the event if it does not perform. As it will be discussed under external aspects, the other threat that faces the company is that of increased competition from other public gyms and its inability to maintain members for a long time (p.7).

Tabular representation of internal Analysis

Strength

  • Has other sources of income, apart from gym membership
  • a wide range of programs
  • pay-as-you-go membership

Weaknesses

  • High overhead
  • Requires a lot of employees
  • Fraudulent accounting practices

Opportunities

  • Use pay-as-you-go
  • Update the brand image
  • Target to children

 

Threats

  • Loosing members with pay-as-you-go
  • Low retention rate of members
  • High competition

Products and Services

The fitness club chain is a full fletched health organization that provides a range of amenities comprising although not restricted to: boxing, aerobics, group cycling, circuit training, free weights, kickboxing, nutrition program, martial arts, physical and spa therapy. Such a range of services and products enhances competitiveness of the company. In addition, the company states its mission vividly: “be people’s total fitness resources via providing outstanding facilities in order to assist one attain results his way”. Certainly, the fitness club chain offers several diverse facilities and endeavors to offer every service in an effective way in order to meet the demand of customers. In addition, the personal training program of the company was designed with the perception that people may need to combine proper food and exercise in order to attain perfect fitness and health.

Organizational Structure of Bally Total Fitness

Structure of an organization depicts the power tier of an organization, indicating exactly the way leadership flows, from management to employees. In addition, the structure of an institution is determined largely by its size, style and type of leadership of the institution. Based on the case, the organizational structure of Bally Total Fitness is founded on a divisional structure of management. Cummings and Worley (p.318) indicated that this organizational structure enables an organization to partition into small units of management that function with some degree of independence. In addition, a divisional management structure enables the organization to manage every department independently, thereby enhancing effectiveness.

Corporate Structure

An organization’s tradition can, as well, be described as its own culture.  Schein (p. 2) highlighted three key aspects of organizational culture: espoused values, intent of the organization and strategic goals; artifacts, methods and visible organizational structures; assumed beliefs, underlying assumptions and perceptions.Therefore, based on the case,it is clear that the culture of the organization is important with regard to successful attainment of missions and objectives. The Bally Total Fitness working environment has been directed towards maximization of a better culture that is a conformity with its excellent service and values of respect to its workforce. This has, therefore, allowed the fitness club chain to establish a good working atmosphere, where workforce feel valued.

Financial Analysis

Ratios for the last three years according to the case

The values may not be perfect, due to scarce data, but the trend remains the same

Ratio

2002

2002

2003

Ratio of earnings to fixed charges

1.4

1.8

2.2

Debt to assets ratio

1.7

1.9

2.0

Earnings Ratio on common stock

0.17

0. 50

0.82

Profitability Ratios

6.5

7.1

8.6

  • Profitability ratio indicates a considerable drop in the company’s profitability as compared to previous periods.
  • Debt to assets ratio indicates the debt level used in the company’s operations. This ratio must be low as high debt level can result in high risk of bankruptcy. Hence with the continued utilization of high levels of debt could put the long-term existence of the company at risk.
  • Both the ratio of earnings to fixed charges and earnings to common stock signify one thing. The more the equity of shareholders is negative along with the losses recorded by the organization the shareholders have to leave with additional loses which will additionally devalue their investments.

External Analysis

Five Force Analyses

Based on the case, the Health Club industry makes one of the unpromising industries to venture into. In fact, there is a lot of rivalry in the industry. In addition, there are gyms of all types to suit every need and every type of people who go to the gym. For instance, there are gyms specifically for women, children, elderly and small, convenient studios. In addition, there are big gym centers with comparable structures and a good number of them have strong brand names.

The industry also faces high chances of entry of substitute products. Furthermore, there is a common trend to have fitness related equipment at workplace, home and even churches. For instance, people can carry out a wide range of things like go outside. Also, from the case, it is apparent that there is a growing desire to exercise and be healthier, but memberships in the gym are not the only alternatives to go. Based on the case, there are small studios like yoga studios, which provide just one form of work-out focus.

Another thing is that the threat of new entrants is high. This is due to the fact that health fitness clubs are becoming cheaper than any other ventures to start out. In addition, health fitness clubs are becoming smaller and at the same time equipment can be let out. On the other hand, clientele in this industry have a high bargaining power based on the reason that they can effortlessly take their business to another place. They can, in fact, choose not to quit their membership, or even they can easily choose not signing for month to month. In addition, there is a wide range of options of where they can sign up. In a nutshell, gyms are always surfacing and disappearing.

In this industry the suppliers also have a comparatively high degree of bargaining power. This is based on the fact that they are only a few suppliers, although Nautilus since 2004 was the leading one (p. 2). These suppliers do provide volume discounts, although they would evidently be ideal for the major gym centers. Additionally, it has always been capital intensive to initiate a new gym. Generally, the health fitness industry is developing in both competition and participators, even though it has been a recurrent endeavor to get people to exercise and not just identify their need for it.

Summary

Bargaining Power of Suppliers

  • High competition amongst suppliers
  • Critical production inputs are similar
  • Volume is critical to suppliers
  • Products important to customer
  • Large number of customers

Bargaining Power of Customers

 

 

Intensity of Existing Rivalry

  • Large industry size
  • Fast industry growth rate
  • Exit barriers are very low
  • Customers can switch products easily
  • Donna Wilkins
  • Geographic  factors restrict competition

Threat of Substitutes

Threat of New Competitors

 

Competitiveness of Individual Companies

YMCA 

The club was started way back in 1844. This means that it is well established in the Health Club Industry. In fact, by 2004 the club was the leading health club operator in the United States. Besides, it has a staff of about 570,000 relative to Bally’s 24,000. This already shows that YMCA is highly competitive in the industry. In addition, it has a membership of 18 million with at one point recording revenues of about US$4.2 billion. This amount is historical in the Health Club Industry. Therefore, the company is highly competitive.

Gold’s Gym

The first of its brands was first set up in the mid 1960s. The company used franchising to position its business in untapped markets. In 2004 the company had about 550 outlets in the US with a commanding membership of about 2.5 million. When compared to YMCA it is evident that it still trails on competitive lines. Just like YMCA, it also targets young people.

24 Hour Fitness

The company was formed in early 1980s and expanded to other markets through acquisitions and organically. In 2003 the company had about 16,000 employees and 305 centers across the United States. Its objective was to tap into the unreached market, which at that time was about 87 percent. The company in 2003 made about US$1 million in revenue. The distinguishing factor is its state-of-the-art technology that enabled it to check the members’ credit cards as well as developing other programs for their members. This company among the for-profit organizations is highly competitive.

Curves International

This club specifically taps into a women-oriented market. Its expansion strategy is also by franchising. By 2004 the company had about 8,000 units serving about 2 million members worldwide. Specifically, it targeted old women; this makes it competitive in its own category.

Economics of Health Club Industry

According to the information from the case, the health club industry comprised of 26,000 health fitness clubs in the United States. Nevertheless, fifty largest companies acquired about 33 percent of industry income and 38 percent of fitness clubs were not-for-profit with YMCA as the major player. On the other hand, the for-profit fitness clubs were divided into key formats: Franchised clubs, a flourishing health club idea was only franchised to purchasers who consented to pay some money in order to manage a fitness club and in return got advertising and professional advice. Management and design companies, as well as Health Spas area is a critical part of the health fitness industry, too. The other is Owner-Operated clubs, which entailed the big part of all health fitness clubs. In addition, over the years they set up chains of clubs in different parts of the nation and also maintained program design, centralized procurement, finance, marketing, collections and accounting.

A good number of health fitness clubs charge clients for a monthly subscription fee in addition to one-time enrollment fee. Moreover, amongst all companies explored, the minimum period for subscription in most health fitness clubs was one year. Although Bally required a thirty six month subscription from the members. Approximately 30 percent of Bally’s clients dropped out, while 70 percent renewed their subscription. Fitness clubs provided the key facilities to their members at the subscription cost paid, nonetheless they as well made about 28 percent of their income by offering extra services such as massage therapy, personal trainers, tennis programs and pro shops. The industry is as well seasonal, and several members enroll only during winter and after the New Year. During this time clubs normally discount their enrollment fee in order to attract clients and efforts of the clubs’ marketing are usually concentrated on acquiring new clients from the demographic.

Acquisitions and Expansion Strategies

As much as the company has been faced a lot of challenges recently, in 1999, it increased its holdings by acquiring a Toronto ten-unit chain called The Canadian Sports Club. In addition, a trendy chain of  about nineteen centers of fitness in the United States metropolitan areas,  Crunch, was added in the mid-2000, in a deal worth about US$90 million, of which most was in stock. With this, the latter acquisition was credited, not for the reason of adding a rich inner-city population, but with infusing the system of Bally with novel workout ideas. Furthermore, apart from these acquisitions, the company was in the process of trimming down its growth rate following its level of growth in the 1990s. The company managed via entering into agreements with different administrations in order to spread its brand overseas in Europe, the Caribbean and China through franchises and joint ventures.

The Key Strategic Issue: Poor Stock Price

As it has been seen from the case, Bally Total Fitness is a United States’ based health club. Since early 1962, the organization had developed into a countrywide commercial operator of fitness centers in the US. However, with the more and stiffer competition in the market as well as the internal management challenges like poor standards of accounting, the company’s stock price collapsed. In fact, a good number of shareholders had lost confidence in the organization. A key shareholder of the business was advising the management to dispose of the company. Therefore, the company was confronted with several alternatives: to defend against potential buyers, reinforce its internal control system in order to remedy the fault of management, and lastly in this discussion is to sell the organization in order to meet the shareholder’s demand. In this way, the company will be able not only to restore the price of stock, but also restore the shareholder’s confidence and enable the organization to remain a force to reckon with in the health fitness club industry.

Alternatives

Defend Against Potential Buyers

Based on the issue of poor stock price, the company has come up with ways of defending against potential buyers.Its registration fees range from US $ 49 to US $ 199 alongside monthly subscription of about US $ 19 to US $ 39. In addition, new members were supposed to pay a 36 month liability upfront (p. 8). In fact, researchers who have been looking into the case of Bally Total Fitness for some time, attempted to give a neutral picture of the woes of the company. To its credit, the company has close to 3.6 million members, in addition to a very strong brand. Furthermore, the front-line managers were unique. That means that they understood ways of selling contract memberships, which has always been the strength of the company for many years. Precisely, it was such kind of contracts that gave Bally Total Fitness the low attrition appearance, even though they essentially had a membership base that was highly inactive. As of today, Bally Total Fitness is attempting to re-strategize toward a month-to-month membership plan, which they consider more favorable. In fact, basing on the case, this is the very same plan type that both New York Sports and Life Time fitness Clubs embrace. Away from issues connected to balance sheet of the company, where it staggers with about US $ 827 million in outstanding debt, the organization requires to inject additional US $ 80-100 million in order to contemporize and smarten clubs. 

Reinforce Internal Control System

The management must be dedicated to enhancing the overall disclosure procedures and controls within the organization as well as to remediating the weaknesses in internal controls, specifically over financial reporting and to execute mitigating controls where appropriate. Thus, as a part of the remediation endeavors, the organization should build up a formal remediation strategy, targeting particular material weaknesses for remediation. In this context, remediation comprises valuable re-design of control verification and procedures, through self-assessment of management and testing of the Internal Audit Department along with its external auditors to make sure that the updated control procedures are effectively operating. Based on the case, the remediation efforts in the company are ongoing, even though, there can be no guarantee that remediation will be successfully executed within the targeted period of time. Normally, the timeline for remediation may extend if tests show that control deficiencies are present.

Sell the Organization

To begin with, businesses are formed with the aim of meeting the needs of shareholders. The company lost about US $ 40 million in 2005. In addition, the company was operating under a hefty debt of US $ 740 million. In addition, in 2007 the organization lost its NYSE listing as its share price tumbled. Besides, in July 2007, through Chapter 11 Plan, the company filed for bankruptcy reorganization. With this, the existing shareholders such as Liberation Investment Group and Pardus Capital Management saw their holding value erased. After this, the reorganized Bally’s equity was acquired by Harbinger Capital Partners at a cost of about $ 233.6 million. This, in fact, meant that the company had reverted to private ownership just after eleven years of being traded publicly. Furthermore, the cash-depleted organization sold some assets that had just been acquired. Bally Total Fitness Chain as well disposed off the Gorilla chain. Not enough, the company as well divested its Canadian clubs to GoodLife Fitness Company and Extreme Fitness Company. Even with the proceeds of almost US $ 18 million, Bally Total Fitness was still overwhelmed by debts and management problems. In 2007, the revenue of Bally Total Fitness was projected to have been at around US $ 800 million by the Fitness Business Pro Journal. With all these problems, it is unlikely that the company will regain its previous position in the Health Club industry; therefore, it will be prudent if the company is disposed of in order to safeguard the investments of shareholders.

Recommendation and Implementation

Out of the three viable alternatives, reinforcement of Internal Control System is the best. This is based on the fact that with defending against potential buyers’ alternative, aspects like a 36-month commitment plan had so many reservations (p. 8). That is, immediately after its establishment, a good number of members filed complaints concerning un-honored cancellation request, the employment of deceptive and harassment means to collect fees, as well as debiting from banks accounts and use of unofficial charging of credit cards. Disposing of the company, on the other hand, is untimely. This is based on the fact that with deteriorating stock price and eventual removal from New York Stock Exchange, the company may not fetch back the amount that shareholders invested. Therefore to take care of all these things, the company must look at its internal control system even if it wants to defend against potential buyers or wants to wind up.

Implementation of Internal Control System

Bally Total Fitness should gain the confidence of investors by adopting ethical governance.  Fort in his book Ethics and governance, indicates that ethics and governance are core components of skill and knowledge base of professionalism today. He continues to argue that, as major decision makers in the business world, accountants and auditors must be experts in compliance requirements, governance mechanisms and regulatory regimes in order to guarantee effective and lawful corporate operations and behaviors (Fort, pp. 1-4). These are things that Bally Total Fitness was lacking in its operations. Also, it can be implemented through offering new programs to its existing customer base. New programs that are well researched have the potential to appeal more to the customers and are likely to retain their membership with the company. The other thing is that the company should employ modern technology, in its internal controls, which allows smooth operation and cost reduction as this will also enable it to stay ahead in terms of competition. The company should also develop marketing strategies that generate more profitability through increased sales. Lastly, the company can reinforce its internal control system through developing incentives to keep the workforce motivated. Bruce (pp.1-2) indicates that motivated worker is always committed to the attainment of the company’s objectives and goals.

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