What are the effects of the chosen strategy?”

Word count: 12.4511 Word count: 20.6012

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1

From introduction till acknowledgements 2

From introduction till references

Jisca Veldsink

S2810611

Jozef Israëlsstraat 97 9718GH Groningen

j.f.veldsink@student.rug.nl

“What are the strategies adopted by SMEs to stay competitive against

their larger counterparts when an industry is dominated by larger chains

and margins are under pressure?

What are the effects of the chosen strategy?”

A CASE IN THE FITNESS INDUSTRY

First supervisor: Dr. E.P.M. Croonen

Co – assessor: Dr. O. Belousova

Date: February, 2017

Master Thesis

MSc BA Small Business & Entrepreneurship

University of Groningen

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ABSTRACT

The fitness industry is very large and dynamic. Moreover, the worldwide economy is just recovering from its crisis. Due to the crisis, the industry has seen an increase of lowbudget chains, which have caused the margins to be under pressure and caused an increase of

competitive pressure for the SMEs. This study is one of the first studies that uses this specific industry to see how small and medium-sized enterprises (SMEs) can compete with different unit types. By doing so we aim to develop new theory that may contribute to a better

understanding of the industry and the effects of competition between unit types on strategic orientation. Especially it may open up some foundations for future research. This study will be of explorative nature, using a case study approach. We have used six SMEs in this industry which may vary in type of offering and location. All of these firms and entrepreneurs have been subjected to the crisis and survived. The study will shed a light on aspects that are very important to firms in a service oriented industry. Interestingly , competition was mostly caused by the crisis, that has been the time that low budget chains have been introduced into the market. None of the firms followed the strategic orientation of cost leadership. All of the firms seek to find points of differentiation. It seems that all of the firms, have one point that they find very important, but the most difficult to manage, namely personnel. All of the firms seek way to lower costs on personnel. Future studies need to look at implications on personnel management. Looking at several aspects such as costs, time management, but also quality of service and qualified staff. Collaborations with third parties, are ought to be upcoming in the future. It is conclusive that more studies should be conducted to find solutions to multiple unpredictable aspects which are faced by SMEs in this industry.

Keywords: SMEs, strategic orientation, unit types, fitness industry, personnel, partnerships,

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Table of content

2.1.1 Independent business owners ... 9

2.1.2 Soft and hard franchising ... 9

2.2 Strategic orientation ... 11

2.2.1 Differentiation strategy ... 12

2.2.2 Low cost strategy ... 12

2.3 Additional marketing tools ... 13

2.3 Graph – units and orientation ... 17

3 METHODOLOGY ... 18

3.1 Case study ... 18

3.2 Data collection ... 19

3.3 Case selection... 19

3.3.1 Empirical setting of the study: the fitness industry ... 20

3.4 Controllability, Reliability and validity. ... 20

4 RESULTS ... 22

4.1 Fitness industry in a timeline ... 22

4.2 Type of units ... 23

4.2.1 Results of competition during a weak economy ... 23

4.2.2 Results of competition during a stable economy ... 24

4.2.3 conclusion ... 24

4.3 Strategic orientation ... 27

4.3.1 Differentiation strategy ... 27

3 4.3.3 Conclusion ... 28 4.4 Marketing mix ... 31 4.4.1 Product ... 31 4.4.2 Place ... 31 4.4.4 Promotion ... 34 4.4.5 Personnel ... 35 4.4.6 Partnership ... 37 4.5 Graph ... 38

5 DISCUSSION AND CONCLUSION ... 40

5.1 Discussion ... 40

5.2 Theoretical implications ... 42

5.3 Conclusion ... 42

6 LIMITATIONS AND FUTURE RESEARCH ... 43

ACKNOWLEDGEMENT ... 44

LITERATURE ... 45

APPENDIX A ... 51

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1 INTRODUCTION

In the last few years many firms worldwide were faced by an unpredicted economic crisis. This has caused uncertainty and instability in different market, which has led to an increase of the number of bankruptcies and a decreasing profit for the surviving firms (Alcalde- Fradejas and Ramirez-Alesón, 2015) . Past research has already looked at how small and medium-sized enterprises (SMEs) faced other difficulties than larger firms. SMEs face more challenges than large firms when it comes to creating and sustaining a new business venture. Large firms dominate fast developing industries. They have advantages such as economies of scale, higher bargaining power and have more capital available, which causes them to withstand external shocks or periods of economic decline better (Bamiatzi and Kirchmaier, 2014). Small firms lack the resources, scope (Nooteboom, 1994) and have a little presence in the market (Baum et al., 2000; Bengtsson and Johansson, 2012) . However SMEs are important for economic growth, they have the ability to create new employment (Acs and Mueller, 2008; Acs et al., 2008; Henrekson and Johansson, 2010; Laurentiu, 2016), sustain survival (Phillips and Kirchhoff, 1989) copy recessionary pressures (Storey and Greene, 2010), boost competition (Laurentiu, 2016) and have a closer relationship to the customer (Nooteboom, 1994). They also have the advantage in being more flexible, meaning they can adapt quicker to changing environments (Bamiatzi and Kirchmaier, 2014; Laurentiu, 2016).

Strategic orientation

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otherwise they will be ‘stuck-in-the-middle”. However examining different results of Leitner and Guldenbürg (2010) show that firms who pursue a cost-efficient strategy, a differentiation strategy or even a combination of both performed equally well. As Tornhill and White (2007) also mentioned, differentiation and low cost strategies are defined as the pure strategies. In our research we are studying the fitness industry. An industry which is a fast moving industry in which several changes have occurred during the period of economic crisis, but now is changing again. Since 2000 several (international) chains have established their business in the Netherlands. Most of these business are low budget chains, such as Basic-fit, Fit4Free and BigGym. This industry is applicable for our study, because competition is fierce and margins are under pressure. These changes are caused due the increase of large firms, (mostly franchise chains) and low budget offerings (Rabobank Cijfers&Trends, Thema-update:

Fitness & Zorg, 2015). This is an industry which can be categorized by one with high end

offerings, companies who differentiate themselves by offering more than just fitness such as wellness and those who offer extremely low fees. Leaving this industry to be an interesting field to study, due to high competition, increasing number of establishments, decrease of customer loyalty and increase of customer price sensitivity (Rabobank, cijfers & trends rapport 2016/2017).

Therefore our study will contribute on the following:

 A study about the strategies applied by small independent businesses to compete with larger (franchise) chains in order to survive.

This study will give answer to the following research question:

“What are the strategies adopted by SMEs to stay competitive against their

larger counterparts when an industry is dominated by larger chains and margins are under pressure?

What are the effects of the chosen strategy?”

New model

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against their competitor. Differentiating between a cost leadership (low budget offerings) or a differentiation strategy by offering high end services. As competition by larger firms has increased since 2000 we will make use of the process approach of Langley (1999) and study how SMEs have reacted on certain events over time. Did the SMEs choose a certain strategic orientation, have they changed their way of doing business to insure their survival, what was the strategy before and is a new one chosen. By introducing the new graph, we will try to detect patterns between chosen strategies between the SMEs during this period of time, by combining multiple process data colleting strategies from Langley that show different actions and events over time. Using the fitness industry for our case study, we will expect to see shifts after the introduction of large (franchise) firms on the Dutch market. We will not go in to much depth of each independent strategy. The overall idea is to use, time, events, outcomes, phases and processes to describe changes in business of conduct, when due to competition, the market changes. Should those SME’s who are now in the mid segment (e.g. stuck in the middle) make a decision to shift to a differentiation strategy or should they also offer low budget fees to stay competitive?

Types of units

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independent small business and franchise chains. However these numbers might have changed over the years due to the increase of globalization, internet and the moving economy.

Marketing tools

We will not only be looking at the generic strategies determined by Porter. We will also take a look at other options for SMEs to compete against larger chains. These options can be related to, or combined with Porter’s strategies. A company can use the marketing mix as a comprehensive tool to compete more effectively in a market. It can help to increase sales and therefore increase profit and sustainability of a firm (McCarthy, 1960). The essence of the marketing mix consist of four elements, namely price, promotion, place and product, the so called 4Ps. Combining all of these elements helps a firm to specifically target a certain market. The original marketing mix has been subjected to change by various researchers and it has been enriched in multiple ways. As shown in the literature review of Goi (2009) about the marketing mix, multiple additions are made to the original marketing mix. Since the fitness industry is a service oriented industry we will use on of the P introduced by multiple researchers such as Booms and Bitner 1981; Heuvel, 1993; Judd, 1987. In the study of Yudelson (1999) the P for partners was also introduced. Although this is written from the perspective of the customer. For SMEs to stay competitive against large firms, partnerships may be an helpful tool for sustainability. Therefore we will introduce the 6th P, namely partnerships.

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2 LITERATURE REVIEW

In this study we will address certain aspects that are important to generate proper results. We will make use of a graph consisting of two axis. It will give a visual on how firms choose certain strategies and how they move in the fitness industry, when changes occur. The graph consist of two dimensions; the horizontal axis will explain the competition SMEs have to deal with. In the fitness industry, large firms are mostly franchise concepts and therefore the horizontal axis will consists of the type of units. The vertical axis will help to create a visual on the strategic orientations firm choose to compete against the type of units.

2.1 Types of units

Will be starting off with figure 1, the independent business owners (e.g. SMEs), moving upward to the right the hardness or standardization of the contracts increase. After SMEs, we have the soft franchise firms, than the hard franchise firms and the “hardest type” the company owned units. SMEs are always subjected to competition by larger firms. In our study we tend to set focus on an industry which has been disrupted by the increase of large (franchise) chains. An old study on retail stores of Tinsely (1975) stated that larger retailers tend to differentiate themselves by having boutique departments, with a higher level of service, tending more towards a high end offering. However, the lack of resources has been cited as one of the biggest obstacles faced by SMEs (Weinrauch et al., 1991b and Eden et al.). This may leave SMEs with a decision, to continue as an independent business owner, or to become a franchisee

Every type of unit has their own type of characteristics and may cause a different form of competition for the SME’s. At first we have the independent business owners of the SMEs. Entrepreneurial characteristics of the owner may affect the performance of the firm.

9 2.1.1 Independent business owners

On the right hand side we have the independent business owners. The independent business owners are key to our study. Growth of small firms is characterized by multiple factors such as the entrepreneur, human capital, size, age, location strategic selection, these are shown in the literature review of Davidsson et al, 2002; Dobbs and Hamilton, 2007. From this point of view it is important to look at the characteristics of the business owner.

The concept of entrepreneurial orientation (EO) has been introduced in literature which covers the structures, behaviors and the strategy-making process of a firm (Lechner and Gudmundsson (2012). The EO has shown to have a positive effect on firms performance (Messersmith and Wales, 2011; Rauch et al., 2009; Wales et al., 2011a.) EO and a competitive strategy are two aspect which are inseparable and should complement each other (Ireland et al., 2003). The entrepreneurial orientation of a an owner can be characterized as the pro-activeness, competitive aggressiveness, autonomy, risk-taking and innovativeness. (Lumpkin and Dess, 1996; Lumpkin et al., 2009). To compete in a dynamic industry, it is important for business owners to stay innovative, be proactive and they need to take risk.

2.1.2 Soft and hard franchising

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degree of intangible assets, it is likely that the entrepreneur has more know-how about the local market. (Windsperger, 2002).

The brand of the franchisor affects the residual decision rights. When the brand name of the franchisor is important, and the knowledge of the franchisee about the local market is low, more residual and specific decision rights are given to the franchisor. (Windsperger, 2002). This is leading to more standardization an thus an harder agreement. Standardizing the contract gives the brand name stability and consistency across markets. (Jain 1989; Keegan 1969; Levitt 1983). Especially in a displacement market such as the fitness industry. it is important to carry a name that is well known in the market. This may affect the performance of the franchisee and the rate of competitiveness in the market for SMEs (Wu, 2015). Several chains may use for example celebrities to promote their brand. (Woolf, 2008).

From a social exchange theory perspective trust plays an important role in creating alliance relationships. Trust is important aspect because of the risk of free riding. As mentioned by Croonen (2010) trust determines the amount of institutional arrangements (e.g., specific decision rights) that can limit or guide the behavior of franchisor and franchisee. So when a contract becomes more complete if there are more specific decisions rights than residual decision rights. For those who remain independent, it is more important to seek ways to create an own known brand.

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As mentioned earlier, the world has been subjected to an economic crisis but economy is slowly recovering. Many firms have been affected by the economic crisis, or did not survive. (Alcalde- Fradejas and Ramirez-Alesón, 2015) Larger firms have the advantage that they have the economies of scale, higher bargaining power. (Bamiatzi and Kirchmaier, 2014) and the ability to minimize cost by centralizing certain activities. Taking this into account we assume that there might be a difference between competition faced by SMEs from different types of units depending on the state economy.

P1a: When the economy is weak, SMEs may face more competition from hard franchising. P1b: When the economy is stable, SMEs perceive more competition from soft franchise units or other independent business owners.

2.2 Strategic orientation

On the vertical axis of the graph we look at the type of strategic orientation a firm can choose. Since the economic crisis, fitness companies and others started to introduce low budget offerings in the market. This has led to a decrease of the high end offerings. Therefore we will use these two dimensions in our graph, meaning that a firm can choose between a high end offering by differentiating, or having a low cost orientation. To explain these two offerings we will make use of the generic strategies of Porter (1980) which suggests that a firm may pursue a certain strategy namely, cost leadership, differentiation or a focus strategy. In our study we will not explicitly use the focus strategy, because focus strategy is a source of competitive advantage, but not a standalone strategy (Porter, 1985: 15). Tokman, Richey and Deitz (2016) have used an even better definition to divide the strategy and position of a firm. In retailing they make an distinction between those firms who choose a ‘low margin – high turnover outlet’ and the others who choose ‘high margin – low turnover outlet’. Choosing a certain strategic orientation may also be dependent on the environment. Literature has been inconclusive weather what

type of strategy to choose in a certain type of economy. Miller (1988) showed that in an stable and predictable environment, cost leadership will be more applicable and in a uncertain and dynamic one differentiation strategy is more appropriate. Whereas Smart and Vertinsky

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(1984) showed that entrepreneurial strategies will be more applicable and in a stable environment, abbreviation is better.

2.2.1 Differentiation strategy

This strategy is about creating the consumer perspective in such a way that the product or a service that is superior or may have unique characteristic (physical or nonphysical to those of other firms (Panwar, Nybakk, Hansen & Pinkse, 2016). This strategy is related to the EO characteristics. Results of Lechner and Gudmundsson (2012) show that especially innovativeness and autonomy have a positive effect on differentiation. Differentiation is about creating a product that is unique for the customers (Grant, 1998). Autonomy is a driver of flexibility and creativity, making a firm able to react quicker to changing customer needs and enhances innovativeness (Hughes and Morgan, 2007). Firms that choose to differentiate are those with higher margins but lower turnover. Firms that pursue this strategy want to deliver high quality products and services. Those firms focus more on high quality personnel, brand image, uniqueness and atmosphere. Multiple studies have shown that this strategy is mostly applied by SMEs in market niches (Watkin 1986; Weinstein 1994; Gibcus and Kemp 2003). A firm can use the marketing mix by McCharty (1964) as a tool to differentiate themselves (Judd, 1987). For the fitness industry supporting services are very common and are used as a tool to becoming more competitive and are important to differentiate from competitors (such as physical therapists or weight loss advice). Especially since the industry is becoming more competitive (Woolf, 2008).

In a fitness industry there are differences between the business strategies that can be chosen. They can differ between premium prices within the low budget chains. As mentioned earlier, the fitness industry is a displacement market, where competition is strong. Competitive advantage in service industries is mostly gained by creating additional supporting services (Woolf, 2008).

2.2.2 Low cost strategy

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the freedom (Brock, 2003). Firms choosing this strategy, choose a low cost offering. These offerings have a lower margin but a higher turnover (Gist, 1968 and Mayer et al, 1971). These firms focus more on operational efficiency, offering customers lower prices. These firms choose to reduce on several added value services such as personnel. Looking at unit type and the type of alliances, firms may seek to lower cost and raise entry barriers for new entrants so that they can lower cost and prices (Tokman, Richey and Deitz, 2016). Results of the study of Leitner and Güldenberg (2010) show that when a firms pursues differentiation or cost strategy, they perform equally well. When a firm chooses to pursue a cost leadership strategy, they seem to have a lower employment level. With this strategy a firms seeks to outperform their competitors by efficiency rather than quality (Green et al., 1993). Firms may seek to lower cost at times of economic crisis. Therefore we assume that depending on the state of the economy a firm may pursue a different competitive strategy. However, because we are studying a service industry, not a manufacturing industry, service and thus human capital is very important, a differentiation strategy may be more applicable for small firm (Leitner and Güldenberg, 2010). Choosing this strategy needs less investments, it can be easily accessed and helps with stabilize the performance of the firm. Also the of Nooteboom (1994) shows that SMEs lack economies of scale and experience, forcing them to be more innovative and provide more customized products. Leading them to be less likely to be able to pursue this strategical orientation. However, it might be that SMEs are forced to offer low budget forms, to compete against the low budget chains, which are introduced after an economic retrenchment. Thus we need to take the economic crisis into account. Therefore we propose that the following:

P2a: When the economy is stable, SMEs perceive more competition from units that pursue a differentiation strategy.

P2b: When the economy is weak, firms perceive more competition from units that pursue a low cost strategy.

2.3 Additional marketing tools

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to the market (van Waterschoot and van den Bulte, 1992). The marketing mix helps entrepreneurs or managers to create strategies too fuse the needs of the customers with the offerings from the firm. (Goi, 2009). It is related to the strategic orientation a firm can pursue, by applying all of the four elements different than ones competitor. In the study of van

Waterschoot and van den Bult (1992), they show that there are some deficiencies with this model. The concept of marketing is dynamic and constantly faced with renewal. This has led the revitalization of the model, namely the adding of new elements to the four P’s. One can think of; probing (Borden and Marshall 1959; Traynor, 1985) or people (Baker, 1997) but for example also personnel (Magrath 1986). This shows that the marketing mix is still a complex subject. In the article of Yudelson (1999) she discusses the concept of the 4Ps with regards to the 21st century. Yudelson (1999, p. 64-65) redefines the four Ps as the following;

“product as all the benefits that the buyer or acquirer obtains for the exchange,

price as everything that the acquirer gives up to obtain benefits,

promotion all of the information that is conveyed between the parties to the transaction and lastly the

place all that is done and required to facilitate or bring about the exchange.”

As mentioned next to those four elements, several elements have been added over the years. The marketing mix can be applied differently over different industries. Constantinides (2006) wrote an article about the visitation of the marketing mix towards the 21st century. Showing multiple literature perspectives on the marketing mix and the possible additions that can be made per perspective.

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Personnel

Personnel is introduced by multiple researchers such as, Baker, 1997; Heuvel; 1993; Ster; Goldsmith, 1999, Booms and Bitner, 1981; Melewar and Saunders, 2000. In the service industry and service marketing, the human element is important. Personnel is an important addition to the perceived value and quality of the received product or service, they are key to the delivery of the service. It can enhance or decrease perceived value. Personnel refers to the staff that performs service for the clientele (Goldsmith, 1999). A positioning of a service oriented firm is intertwined and influenced by personnel. Because the human element is so important in service oriented organizations, a great emphasis is on educating, training, supporting and rewarding personnel. Yudelston (1999) suggests that one more P should be added to the marketing mix, namely partners. Using partnerships as the 6th addition to the marketing mix.

P3: SMEs use personnel as a tool in their strategic orientation to create competitive advantage.

Partnerships

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(1996) shows that the number of hospital-sponsored fitness clubs have doubled. Unfortunately findings are not based on the Dutch market and thus may differ in the Netherlands. However, he shows an interesting aspect, when both are integrated, it may be beneficial for customers, because it is easier to integrate specific diagnostic and treatments. Parrot (1996) discusses several aspects that may benefit customers when both of the parties collaborate, supporting in the rehabilitation of sports injuries, diabetes, obesity or heart diseases. Also the cijfer & trends rapport of the Rabobank (2016/2017) addresses these opportunities that lie in the market for fitness centers. One of these opportunities is the collaboration with third parties such as physical therapists, dieticians and other medical practitioners. Therefore we assume that partnerships may be beneficial for SMEs to gain a competitive advantage.

17 Figure 3

2.3 Graph – units and orientation

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3 METHODOLOGY

The goal of this study is to investigate how small fitness centers are able to survive in a market that is extremely dynamic and has also been subjected to economic crisis. There has been a lot of research done on strategic orientation of SMEs and about the different types of franchising units. However, not much research has been done on the competition between SMEs and types of (franchise) units. Also, this study has not been done in this specific industry before. Studying this topic will give us an better insight in the industry and what strategies can be applied best when competition is increasing and economy is changing. Differentiation on several levels is becoming more important. However is differentiation in services still the right move, or should SMEs lower cost.

3.1 Case study

Eisenhardt (1989) explains that using a combinations of methods can create more coherence between the data. A case study research can involve multiple types of data (Yin,1984; Aken, Berend & Bij, 2012). Qualitative data will be collected by using in-depth interviews with four different types of SMEs and one of the SMEs was contacted by email. According to Eisenhardt (1989) a number between 4 till 10 cases are ideally. More cases will cause over complexity and anything less will be unconvincing. Combing qualitative data with theoretical background, observations and real life experiences of the researcher could support in creating a better understanding of the relationships that were not as obvious to the researcher before (Jick, 1979).

The industry that we are studying is very dynamic therefore a strategy can change over time, due to certain events, or changes in the environment. We have taken the economic crisis as an event that may have caused changes in the business of conduct in the fitness industry. As Langely (1999) stated, process theory is related to see how things evolve over time and why, which can be due to certain events, choices or activities. These changes may have an effect on the business. Especially, the formation of strategies are difficult. Due to limitations in time, we could not conduct a full process approach however, we will use this perspective to see how the economic crisis has impacted the competitiveness in this industry.

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3.2 Data collection

After the conceptualization of the theoretical framework, we are able to set up some propositions and see if they can be justified during our study. Based on Emans (2004) we have set up an interview protocol (see appendix A) using semi-structured interviews. First we wanted to gather some general background information about the entrepreneur (e.g. the independent business owner). Secondly we want get to know a little bit more about the market and how they see their position within the market and the way they are performing in comparison to their competitors. Using the process approach perspective from Langley (1999) we will go back in time with the interviewee to see if there strategy has changed in order to insure firms survival over years. Thirdly, as discussed in theory, two different strategic orientations can be chosen. Asking the SMEs which strategic orientation is most common and if shift can be seen between cost focus to differentiation focus. Lastly we want to discuss the strategic option chosen by the independent business owner and why. Also using the two additional Ps that we have included in our theory, based on the marketing mix from McCarthy. To see if these two additional elements are used by SMEs as an extra method to gain a strong position in this specific market.

3.3 Case selection

20 3.3.1 Empirical setting of the study: the fitness industry

First off we need to give a short recap of what this industry looks like and why it is interesting for our study. The fitness industry has grown tremendously worldwide. The Netherlands has around 1850 established fitness centers. It is a sport that becoming more booming every year. Over 200 million visits are payed to fitness centers every year. It is a market that generates about 1,2 milliard euros in turnover. In 2013 over 20% of the fitness centers were part of an franchise chains. Since 2000 several international chains have established their business in the Netherlands (Van Spronsen & Partners horeca advise, 2013). Several low budget chains have opened their doors, such as Basic-fit, Fit 4 free and Big Gym. The market share of low budget chains is around 25% and is expected to increase in the upcoming year (Roll, 2016). This means that smaller individual fitness centers need to have an excellent competitive strategy, to compete against larger chains. Ass Roll (2016) stated, it is important that as an individual business owner, that you offer something unique. It is not feasible for SMEs, to compete in the price war. The fitness industry is a very dynamic industry, new opportunities tend to arise in the market. According to the rapport of the Rabobank Cijfers&Trends (2015/2016) opportunities lie in offering other types of (full package) services such as small group training, other types of training methods and cooperation with other health care providers.

3.4 Controllability, Reliability and validity.

As stated by Swanborn (1996) and Yin (1994; Aken, Berend & Bij, 2012) the following criteria are the most important for assessing the quality of a research: controllability, reliability and validity. Those criteria provide tin inter-subjective agreement on the results of this study (Aken, Berend & Bij, 2012).

Controllability

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Reliability

The criterion reliability of the study is met when the study can be replicated in other studies when they are independent of particular characteristics (Yin;2003 Swanborn, 1996). To make sure that the instrument (e.g. the interview) was reliable we made use of our interview protocol from Emans (Yin 2003; Swanborn, 1996). A supervisor was present during the research period, to oversee the process. This helped reduce the researchers bias. The respondents were interviewed in the same type of environment namely the fitness center.

(Aken, Berend & Bij, 2012).

Validity

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4 RESULTS

In this chapter we will show the results that are derived from the interview with the four fitness entrepreneurs. We will look at all the six propositions that have derived from our literature. The results of the interview are shown in Appendix B.

4.1 Fitness industry in a timeline

The owner of SENSE used some useful references to categorize times in the fitness industry. We have summarized them below and added a few extra.

- Diamond times; that was at the time that when a gym opened, they have over 700 new members in a day. Assuming that the industry will continue to grow.

- Golden times; those were the times that the high end fitness chains came. Which forced some SMEs to go along with these market changes, investing in all kinds of extra facilities, services and staff.

- Economic crisis; the period of the introduction of the low budget chains, which has caused many of the SMEs to go bankrupt. As the owner of infinity flow stated, they did not take into account that the golden times could end, making the current revenue model redundant.

- Nowadays; According to the owner of Olympic gym, the members that left due to the low budget chains are coming back. Mostly 70-80% of the customers returned after 1 or 2 years. Creating a new revenue model by selling additional services, that are low on investment but higher on return.

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4.2 Type of units

4.2.1 Results of competition during a weak economy

24 4.2.2 Results of competition during a stable economy

4.2.3 conclusion

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caused by the crisis. All of the firms do not perceive a higher or weaker form of competition from soft franchise units. As the owner of infinity flow stated; all of the bigger high end

chains, have focused their business conduct on the times when the industry was flourishing. They had the idea that everything comes at its end. So they build larger clubs. They have never foreseen the possibility that these times might end. That was when the low budget chains came. The industry is categorized by respect from entrepreneurs to other

26 Figure 5

bounding with personnel. Only Olympic Gym is a soft franchised chain. They said that the advantages of being a small franchise chain, they are able to respond and bond with the local market.

Future

All of the entrepreneurs agreed that the economy is getting better. They see the membership numbers grow. GO180 stated the following; “ at the time that I was studying(2005-2009)

people had the tendency to get a membership in a budget club, everything needed to be as cheap as possible. However, nowadays people want to invest in health again. This was

confirmed by all of the other entrepreneurs, the owner of SENSE wanted even wanted invest again; “ I want to expand with a tanning studio. The first thing people do when the crisis is

over, is investing in themselves, not in primary life necessities, they want to do fun things.

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4.3 Strategic orientation

To stay competitive a firm needs to choose a certain type of strategic orientation. There are two extremes, one can choose to pursue to differentiate by developing a high end fitness center, or compete with a cost leadership strategy such as the low budget chains.

4.3.1 Differentiation strategy

28 4.3.2 Cost leadership strategy

In times of economic crisis, firms need to reduce costs in order to survive. Therefore we want to see if SMEs pursue a cost leadership strategy in order to compete and survive. The results are listed in the table below.

4.3.3 Conclusion

We assumed that firms will chose a different type of orientation depending on the state of the economy. When choosing a certain type of strategic orientation it is important to look at the target groups and the area where you want to locate your fitness center. After some information exchange with the owner of Olympic Gym the owner of a small franchise chain (4 locations) said the following; “there is no standardized plan, the environmental factors are

different for every company. That is why we are located at four different locations and use 4 different concepts. From low budget to exclusive

- . Low budget gives us the most administrative work, because it attracts people that do

not have much financially, meaning delayed payments etc. They are also not loyal, the do not have bonding with the staff nor the community.

- Exclusive Due to low budget chains, exclusive clubs have been out of the picture, but it

has been making its way back. It causes a market force, those people who do not want low budget chains do exactly the opposite.

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Figure 6

The entrepreneurs agreed that it is not realistic to compete with the low budget chains by lowering costs. They all have found a way to create a way to differentiate themselves from other competitors. Competitors mainly consisting of low budget chains. SENSE and City Fit used EGYM as a way to differentiate themselves from competitors. As the owner of City Fit said; EGYM is less labor-intensive. This is a way for these gyms to reduce costs in a creative way, but also a way of generating extra revenues by asking €5,-

more for the use of this concept. The owner of SENSE wants to differentiate by starting the tanning studio, but also EGYM. One needs to advertise fast fitness, people do not have the time anymore to spend hours in the gym, therefore it is very important to create concepts that gives you the ability to hand customers a quick fix. This is something that Fit Sports does as well. Differentiating by offering complementary packages or options next to the regular membership fees. Fit Sports focusses on small group training, so that the customers get a closer bond with the instructor and the firm. They emphasize the importance of extra service such as babysitters, so that the mothers can work out. The owner of infinity flow is also the product manager of Plaza Sportiva. Plaza sportive was a high end club in Groningen, that has been close to bankruptcy. He was asked to create a new strategy for this company. They now

differentiate by focusing less on the club itself, but also looked for complementary services that can create extra revenue services outside the club such as coaches, companies, lifestyle coaches etc. All of the entrepreneurs agreed that the high end fitness centers, where fitness centers are becoming more full wellness resorts is at its end. They all stated the following; if

customers want to go to a sauna, they make a day of it and go to a specialized wellness resort.”. This is confirmed by SENSE, who still has a sauna in his facility, of which the usage

can be neglected.

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4.4 Marketing mix

In the interview we have shortly discussed the four Ps introduced by McCarthy. Therefore we will shortly discuss the four Ps below. They all have shown to be of importance in this industry and related to the strategic orientation that the all of the individual firms have choose.

4.4.1 Product

As we can see in the table below, the product and service are inseparable. All of the fitness centers offer some complementary services or product to differentiate themselves from competitors.

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However the type of product or service offerings depends on the location of the firm. A good example is Fit Sports and Olympic Gym who have multiple units. For every location they have a different concept. Place can also be related to accessibility of the gym. Two SMEs that I have been in contact with have pointed out that parking space is a difficulty. They criticize the local government for this problem. Hercules is a gym that has lost customers due to the introduction of parking fees. In many regions you will find multiple fitness centers closely established to other centers. That it is why it is important to differentiate. It is very dependent on the size of the population, all of the entrepreneurs talk about; one should not fish in an

empty pond. If we look at outside village near to a town. People are more tended to go to a

city to find a gym than the other way around. As the owner of GO180 stated: ´You’ll probably

face more competition in a larger city, however the amount of potential customers is larger”.

At that point, one will return on quality and points of differentiation.

4.4.3 Price

All of the entrepreneurs agreed that it is not possible to compete on price with the low budget chains. However, there are some inventive ways to create more revenues by offering all kinds of complementary products or packages.

All of the entrepreneurs agreed that the economy is recovering. Citysports stated that before the crisis they yearly increased their membership fees in alignment with the inflation. During the crisis, this was not an option. This is what has been fateful for many of these firms, they decreased the prices of their membership fees and went bankrupt. Although the economy was weak, prices of utilities did not decrease, they even went up. SMEs need to pay the rent, lease contracts, licensees for the group lessons etcetera. This causing the revenues to decrease. This year Citysports is increasing their contribution fees again since the crisis, assuming that bonding with and understanding of the community is that strong that clientele will stay. Fit Sports and Olympic gym are good examples of SMES strategically merging price level and location with each other. Choosing a different kind of strategic orientation for every location and different kind of pricing. Pricing should be in line with the target group at the specific location.

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you want to spend your money on, some people pay around €800,- for a phone. They are

convinced of their own quality and abilities; “If you need to promote with stunt prices such as

half price, than you probably need customers. Then your doubting your own capabilities and you are not believing in yourself.”. Plaza Sportiva was a high end fitness center, but is really

struggling with survival and has been submissive to several reorganizations. Leading them to gain revenues with activities outside of the fitness club.

34 4.4.4 Promotion

Every firm has their own way to promote their firm and there service offerings. In the table below we listed the items that all of the firms use to promote their own services.

Most of the entrepreneurs do not use extreme promotional activities to promote their club. As the owners of infinity flow and GO180 stated; building a network is also very important. By continuously visiting trade fairs, congresses and following some extra educational

35 4.4.5 Personnel

In our study we have added the P for personnel. Theory states that in a service guided industry, human capital is a very important aspect of the perceived quality of the service. Therefore we assume that that personnel is used by SMEs to create a competitive advantage.

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injury sensitive. Qualified staff is therefore very important. However, there is no CAO (collective labor agreement), nor a branch organization. Even the profession of a personal trainer is not protected, meaning anyone can call themselves a personal trainer. Discussing this with the entrepreneurs did not give any solutions, only an agreement on this setting.. They have agreed that this is a problem which making it difficult for customers to asses who is a good trainer and who is not.

Thus, the most interesting problem are the personnel management problems. It is an industry driven by humans. Employees can create enhance the service experience. As the owner of Olympic gym said: “It is not about the sauna’s, air-conditioning, the wide range of groups

lessons or exclusive new training methods etcetera. It’s about social contact, working with a consistent team. At Olympic gym they are working with the same team, for a couple of years.

This has created a bond with the employees, which is the most important aspect;” service

provision is about the service, and services are originated by people. The owner of SENSE

stated that the first expense on which an entrepreneur can save are the employment costs. As mentioned in the pricing results, fixed caused remain the same, so you need to cut on staff expenses. When the owner of SENSE started, he expired all of the functions and give everyone the same function, after a period of time, he decreased the working hours of the staff, and increased the hours of the interns. Most of the high end club failed, because they had a lot of staff and a lot of different functions inside the gym, which is expensive. Most of the low budget clubs only have one or two employees. An advantage of working with interns is that they are eager, enthusiastic, which may have a positive effect on the customers and their willingness to train. Fit sports really invested in educating the staff. This way they can offer extra services such as vitality coaches or weight loss coaches. He agreed that there is a bottleneck between personnel management and remaining quality. An fitness entrepreneur needs to deploy staff at the most economical way. An example of what they did was combining functions, the receptionist is also watching the gym. He created a rotation system. The only exception is GO180, who’s quality of services, and survival is based on the quality of the staff and results that they achieve with the customers.

37 4.4.6 Partnership

Strategic alliances can be very fruitful for SMEs to create a stronger position in the market, to access new resources or expand the customer base.

As can be seen in the table above, most of the entrepreneurs are already collaborating with some third parties such as physical therapists.

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All of the entrepreneurs see opportunities in collaborating with third parties, in all kinds of forms to increase a strong position in the market. Partnerships might stimulate knowledge sharing, it can help SMEs, to increase credibility. However, they also might be a new source of revenues. SMEs can rent out space for certain partners, creating special offers for customers with these partners. Thus new revenues, new collaboration, new service or product.

4.5 Graph

Figure 7 shows the positioning of the different firms in the specific industry. The orange circles show the amount of perceived competition. Unfortunately, we lack information on the unit types in the industry, therefore we needed to make assumptions. All of the firms agreed that the highest and the hardest form of competition were low budget chains (e.g. company owned units).

SENSE faced some competition of one small franchise chain, offering a more high end offering and a fitness chain that orientates more on costs. GO180 is facing more competition from other personal gyms. They agreed that they are competition however, also

39 Figure 7

We can also see what type of orientation the firms have chosen. With Olympic Gym as an exception, none of the firms have chosen a cost leader orientation. The economic crisis had no effect on the orientation of the firm. Although all of the firms have seeking to find ways to lower costs on certain aspects of the firm. The most important aspect was that an entrepreneur should believe in their own qualities and should be true to themselves. They should not lower costs and try to compete with lowbudget chains on price, you will lose. You should take the specific location and the target group into account when determining your strategic

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5 DISCUSSION AND CONCLUSION

5.1 Discussion

Based on the results of our study we will discuss the findings in the following section. During our study we tried to answer the following research question: “What are the strategies

adopted by SMEs to stay competitive against their larger counterparts and how do they relate to an industry that is dominated by larger chains and margins are under pressure? We also

have sub question that we are trying to answer namely: What are the effects of the chosen

strategy?”.

Firstly our study confirmed that the industry is very dynamic. The highest disruption in the industry is caused by the economic crisis. Which has caused the emergence of the low budget chains. Those chains have multiple units , characterized by standardized agreements and mostly contracted by harder franchise agreements, or occur as company owned units. The larger counterparts in this industry are thus in fact mostly low budget chains that were introduced in the time of the economic crisis. In contradiction to study of Woolf (2008) who stated that fitness centers have shifted towards more facilitating offerings centers, the contrary happened in the Netherlands. Our results show no conclusive answer on the other types of units. The entrepreneurs have mentioned that they feel competition from other types SMEs such as personal trainers or small group training. Although this is not at such a level that it may cause a threat. So the SMEs especially perceived competition from very large counterparts, they have the advantages of cost minimization due to economies of scale. They choose to have higher turnover with lower margins. This means that all of the SMEs need to increase contrast between their own firms and those larger counterparts.

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changes caused by the economic crisis in their own way, For example, the increased need for a quick fix, which is provided by EGYM, or offering indoor spinning sessions during the winter period. As Porter stated (1985) they need to find innovative ways to lower costs of producing services. This happened mostly on employment level. This is where the “bottleneck” lies as stated by the owner of Fit Sports. Study of Leitner and Güldenburg (2010) shows that when a firm chooses to a cost leadership strategy, continuously tries to reduce costs of the staff. Therefore having a lower employment level. All of the SMEs are trying to do this in ways, that customers satisfaction does not come into play. A low cost orientation is more focused on the processes. Macintosh and Doherty (2007) state in their article, perceiving a high service and of good value, customers tend to be more loyal to the company that provides the services (Ham et al., 2003; Venetis and Ghauri, 2004). When a firm choses a cost leadership strategy a firms seeks to outperform their competitors by efficiency rather than quality (Green et al., 1993). All of the firms tried to find new ways to differentiate, creating customer loyalty, but because the industry is such dynamic and fast moving. So decisions are not purely based on differentiation or cost leadership strategies but more and trial and error strategy. Continuously introducing and loosing services. Just see what works. This has had the effect that all of the firms have survived the crisis and are mediate satisfied with their results. There is also the so called “bottleneck”. Employees are highly involved with the delivery and quality of a service. Staff can be used as an competitive advantage and might offer some possibilities for in the future. Nowadays, employees are the largest debit entry. The most difficult post to manage on the balance sheet. Unfortunately none of the entrepreneurs have found a solution to this problem. They have tried to find solutions with interns, or specific rotation schedules. However all want to maintain a high qualified staff, by for example giving them several education options or trainings. As the owner of Olympic Gym stated, some of the clientele perceive the social contact, bounding with customers as the most important aspect. It is important to work with a consistent team. So indeed, employees can be used to create a competitive advantage when they have created a special bound with customers. But this is being interrupted with difficult management problems.

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customers in for example obesity, mindfulness, or physical therapy. Gaining new revenues, by setting rooms in the gym out for rent. However this is still in a start-up face and might interesting for future research. As the owner of Infinity flow said “some of the predicted

trends from 8 to 9 years ago are still not implemented”. So Parrot (1996) study might come at

use 10 to 11 years later. All of the firms agreed that it is a beneficial asset for the firm, but not directly to increase competitive advantage.

5.2 Theoretical implications

There is no existing literature on how SMEs perceive different types of competition from different types of units. This is very unfortunate because this phenomenon is increasing tremendously, not only in the fitness industry. This study have opened up a whole new field of study. Although there is a small number of studies conducted by Woolf (2008) or Parrot (1996), more studies are required from a management perspective. Results of the study shown to be somewhat consistent with the literature that has been found, but also contradicting. New theories should be developed on which strategy is best applicable with a certain type of unit and still taking the environment into account.

5.3 Conclusion

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these costs and maintain quality. For future developments, also in the Dutch population and healthcare, partnerships might be very interesting. All of the entrepreneurs agreed that this may offer opportunities for in the future, it can increase knowledge sharing and might help SMEs to find new resources. All in all a field of study which might be very interesting for the future.

6 LIMITATIONS AND FUTURE RESEARCH

This study has various limitations. The first limitation is that we only had specific amount of time, which caused us to only asses six different firms. All of the firms were SMEs with a single unit, only two had multiple units. Due to these limitations, the study might be less generalizable and might not include perspective from other unit types. Also the study is conducted in the North-East of the Netherlands. As the entrepreneurs mentioned themselves, mentality and clientele may differ in the South and Western part of the Netherlands. Second, we did not take into account the perspective of the customers, it might beneficial to take customers’ needs into account . It might give more insight on different target groups and their specific needs. Thirdly, it might be fruitful to work with multiple investigators to decrease the researchers bias. Finally, no experts on the industry have been interviewed. Experts might have other information on developments in the industry.

Future research should look at all of the aspects named in this study as a single variable. A study on competition between SMEs and unit types should shed a light on amount of competitive pressure that SMEs face per unit. Not only shortly after an economic crisis but scattered over multiple years. Secondly, future research should focus more on management of personnel in this industry. With this, knowledge of experts should be taken into account. They might find possible solutions to manage personnel more efficiently. This specific asset might be subjected to change, because one of the branch organizations is working on a collective employment agreement (CAO). The creation of this CAO might change qualifications, that are required of staff, might change the salary requirements of staff etcetera.

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customers. Or offerings like Fit Sports, they offer additional packages to customers such as vitality coaches. A concentration on prices might have been made between the fitness center and the self-employed entrepreneur without staff, to offer a good fee to their customers.

ACKNOWLEDGEMENT

First off, I would like to thank my supervisor, Dr. Croonen. She has supported and guided me throughout this process. Offering me guidance in times of need and feedback to improve my work. Also I would like to thank all of the entrepreneurs that have found the time to help me with my study. For me it has been an interesting field of study, of which many more should follow. All of the entrepreneurs agreed, that this industry is very dynamic and complex, therefore supporting me in providing me with all sorts of information.

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