The Health Club Industry
This case provides an opportunity to practice analyzing the industry environment and how it might influence the strategic issues facing a firm. In essence, any industry analysis requires us to think about how broadly we should define the scope of the industry. Please be sure to identify the boundary of the industry.
In preparing your case for class discussion, please ensure you have read chapter two from Dess Lumpkin and Eisner, 2012, which is available on Blackboard. Further detail is available in Porter, M.E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86 (1), 78-93, which can be found via the library catalogue.
Please focus your notes on trying to apply each of the five forces mentioned in this article to the case study. Look at what contributes to each of the five forces and try to identify or interpret data and evidence from the case to make a judgment about each of these. Avoid merely describing the case by ensuring you use the model as a framework for analysis; then for each component of the model, evaluate whether that ‘force’ would present difficulty for a firm competing in the industry. Finally, you should consider what the framework as a whole tells us about the industry and implications for firms. You may use the worksheet below to help you structure your notes if you wish.
Please note: in real life, as in the case, we often don’t have full information so have to make ‘best assessments’ based on the data we have. If you find there are no data to address a factor, leave it blank.
Use the Five Forces framework to assess the relative strength in each of the areas (please re-size document as you wish). NOTE – if you cannot find or infer information in the case to address a factor, leave it blank Threat of New Entrants | Evidence from case | Implications for this ‘threat’… does it lead to high/low barriers to entry | Economies of scale | Franchises will have increased purchasing power | | Network effects | | | Switching costs of buyers | Health clubs typically charge a joining fee and new members were typically committed to a minimum subscription period | High barriers to entry as joining fees will make customers more committed to their current gym. The barriers could be reduced by offering no joining fees for first ## members to sign up | Capital requirements | Capital requirements are high when setting up a new health club. Nautilus estimate It would cost approximately $144,000 to outfit a 10,000 sq ft start up with equipment. The cost doesn’t include the actual premises itself which will also be costly. However studio sized clubs such as Curves franchises take considerably less capital to set up | High barriers to entry for larger traditional gym setups. However the barriers for entry for studio sized clubs are considerably lower. | Incumbent firms’ control of distribution | | | Incumbents’ control of suppliers/raw materials | | | Incumbents’ control of patents/technologies | | | Government policy | | | Expected retaliation | The only potential retaliation mentioned is larger chains buying out any smaller groups | Low barriers to entry because if a firm is bought out then it is most likely that they will sell for a profit | Bargaining Power of Suppliers (if this is different for different supplier groups, note the difference) | Evidence from the case. | Implications for the ‘power’ of suppliers … does this lead to stronger or weaker power of the suppliers? | Concentration of suppliers relative to firms (rivals) (many/few) | There are a small number of well-known producers of equipment that clubs purchased their equipment from | This will lead to stronger power of suppliers as there is less competition for a large number of buyers | Importance of the firms (rivals) to the suppliers’ profits | | | Switching costs of firms (rivals) | | | Differentiation of the suppliers’ products/services | There is minimum differentiation between the suppliers products | All suppliers will be offering very similar products as they are all aiming for the same market E.g. All treadmills will need to serve the same purpose which is to allow the user to run on them. The only opportunity for differentiation is the frills such as an in built TV etc. | Availability of substitute products | There is little availability of substitute products. | This leads to stronger power of suppliers as all health clubs will need similar equipment such as treadmills, cross trainers etc. | Threat of forward integration by suppliers | | | Bargaining Power of Buyers (if this is different for different buyer groups, note the difference) | Evidence from the case. | Implications for the ‘power’ of buyers … does this lead to stronger or weaker power of the buyer? | Concentration of buyers relative to firms (rivals) | There were over 23,000 health clubs and they claimed over 39,000,000 members meaning an average of ~1700 members per club | This leads to weaker power of suppliers as no one customer will have significant bargaining power | Product differentiation of firms (rivals) | | | Switching costs of buyers | Health clubs typically charge a joining fee and new members were typically committed to a minimum subscription period | High barriers to entry as joining fees will make customers more committed to their current gym. The barriers could be reduced by offering no joining fees for first ## members to sign up | Threat of backward integration by buyer | | | Importance of the firm (rivals) to the buyer’s activities (e.g. quality, costs, profits) | | | Threat of Substitutes (if this is different for different substitute groups, note the difference) | Evidence from the case. | Implications for this ‘threat’… does it lead to high/low threat from substitutes | Differentiation of the substitute products/services | | | Rate of improvement in price-performance of the substitute | | | Buyers switching costs are low | | | Intensity of Competition Between Rivals | Evidence from the case. | Implications of this for the degree of rivalry --- is it higher/lower | Number of firms (many/few) or equal in size | | | Industry growth rate | | | Exit barriers | | | Commitment to the industry | | | Ability to read signals | | | Fixed costs | | | Capacity | | | Perishability | | | Differentiation between firms’ products/services | | |