Richard Branson and the Virgin Group of Companies in 2007 analysis.pdf

Case 20: Richard Branson and the Virgin Group of Companies in 2007 Case Problem The Virgin Group is seen as a “branded venture capital organization” (p.817). Virgin Group is comprised of over 200+ companies controlled by “some 20 holding companies” (p.816). The complex structuring of who owns what creates legal complexities in order to shield the company and its minority shareholders. Each company operates as an independent company belonging under the Virgin umbrella (p.816). New companies are usually startups supported by internal equity and external financing (p.809). 2007 started with Virgin announcing many initiatives which will further diversify the brand. Virgin planned a joint venture to develop ethanol (Virgin Bioverda), a bid for First Choice (a vacation company), and a proposal to enter rail service (p.806). It would seem that the company is paving a strong road for success with its charismatic leader, Richard Branson, leading the way. However, despite these initiatives, the company is overshadowed by public doubts and criticism. The lack of financial transparency caused many to question the financial health of the company (p.809). Further concerns with overextending and utilization of the Virgin brand questioned the strategic direction of the firm (p.809). Many wondered if more can be done to manage the risk and ensure a strong future for the organization. The case analysis of Virgin’s key success factors and issues shows areas for opportunities to exploit their competencies and highlight opportunities for change in order to minimize the future risks to the firm and secure their future existence. This paper will conclude with key recommendations on what actions and plans are needed in order for Virgin to strengthen its position. 1

Virgin Key Success Factors As with the case statement on page 811, Virgin’s greatest asset is the Virgin brand. The brand allows the firm to enter diversified areas of business from airline to rail to financial and automatically providing that new business with its brand equity. The brand was built on “value for the money”, “quality”, “great customer service”, and on “innovation and fun” (p.811-812). The brand is also the link between all 200+ companies unified under the Virgin brand. This allows for all companies under the Virgin umbrella to utilize the brand recognition in its marketing effort, thereby, creating one voice and one image. Along with the brand, Virgin is synonymous with Richard Branson, the company’s strong and charismatic leader. Branson at times may be quirky with his public antics; he remains the vision behind Virgin’s strategic direction. Branson’s strength lies in developing and implementing new business ventures (p.814). He also encourages others to develop new ideas, which created the “entrepreneur spirit” that permeates throughout the organization. Richard Branson, the promoter of innovative ideas also shaped the strong corporate culture at Virgin. This key strength lies within the people employed at Virgin, both at the management and business unit level. This culture provides an environment where “talented and ambitious people” are motivated to perform at a high level (p.818) and commitment is strengthened through “financial rewards and nonpecuniary benefits” (p.818). The decentralized structure of the organization involved very little hierarchy. This permits for speed in the communication process and for quick and flexible responses to the organization’s needs. This lack of formal control is also the reason behind the high level of teamwork and entrepreneurial spirit (p.818). This spirit and lack of bureaucracy allows for quicker decision making so managers can effectively pursue the business goals. 2

Virgin Key Issues First, the financial structure of the company makes it difficult to evaluate the overall health of the company. There seems to be no internal accounting or record keeping on how each company is performing. The other concern is Virgin’s startup companies are financed through internal equity and external financing. If a startup fails, it will weaken the financial health of the company. Historically, Virgin has in the past, sold profitable and growing companies in order to finance new ones (p.810). Second, the over diversification of company put Virgin at a greater risk for failure. Virgin has 210+ companies that range from airline to bridal gowns to financial services which create many organizational complexities (p.414). The unrelated diversification can cause a lack of focus or shift focus away from the organization’s core competencies, which in the long run can affect the company’s profitability. Also, over diversification tends to result in the company to “crosssubsidize poorly performing [companies]” and to reluctantly transfer cash flow to better performing companies (p.413). Although Virgin is able to create value from diversification by “exploiting linkages between the different businesses” such as the brand and Branson’s leadership (p.409; p.416); over diversification into businesses that do not align with their core competencies can create inefficiencies and profitability concerns. The strategic linkage with the use of the brand in all these various businesses can potentially dilute the brand, especially if that business fails. Lastly, the decentralized structure is a potential source of weakness to Virgin. Decentralized structure does create many positives as mentioned in the above “key success factors”, but it also has negative consequences. The current structure is a contributor to the organization’s successes, but if the external environment changes, then the structure become 3

inefficient. For example, in the event that England’s tax law changes, Virgin needs to reorganize in order to take advantage of any changes. The current structure creates coordination and agency problem concerns since each business is independent and each are pursuing its own individual goals. Finally, the other concern as it relates to organization structure is the role Richard Branson plays. Currently, he is the face of Virgin and controls the entire business. If anything negative occurs as a result of his actions or he passes away, the company and the brand will suffer.

Recommendations 1) Divest and focus on areas of success through consolidation In order to maintain the integrity of the brand image, Virgin keeps businesses around that are not profitable. The practice of subsidizing failing ventures with the cash flow of healthy ones needs to change to provide overall financial health for the organization and for the brand. Virgin should divest businesses that are not profitable or not aligned with their core competencies. Virgin’s focus should be concentrating on what they do well such as the area of service delivery type of businesses (airlines, rail, mobile/wireless communication, etc). Divesting poor performing or unprofitable businesses will reduce future risk of damaging the Virgin brand. It will also free up cash flow to reinvest in businesses that are successful and expand into other markets (internationally). If Virgin consolidated successful companies into one group, they can refocus developing the product or service line in each and expanding their offerings into new markets. The focus to build on the successful companies can strengthen the financial position of the organization and increase the brand equity.

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If Virgin wants to continue to diversify, they should focus on diversification within related businesses (p.415) that are similar in industries, markets or technologies (p.416). For example, do not make the leap from being successful in music publishing (successful business that Virgin sold) to now wanting to make a “coke” like beverage (which Virgin was unprofitable). 2) Create “contingency approaches” to organizational design Virgin needs to implement some type of formal structure or plan of succession in the event that the competitive environment changes, strategic direction changes or if Richard Branson is no longer in existence. Currently the control of the organization lies within one single person, Branson, who is also closely tied to the brand image. If Richard Branson passes away, the brand can fall with its owner. If Branson’s public image is tarnished, the Virgin brand image will also be tarnished. As a result, it is best that Virgin reduces the interdependence relationship between Branson and the brand. One suggestion is that Virgin can create a Board of Directors that can counterbalance Branson’s decision making. At times, Branson’s decisions are made on personal belief and sense of fun rather than on “commercial logic” (p.813). A Board of Directors can create synergy in decision making by pooling all the knowledge, talent, and expertise. This will also create a check and balance so that financial decisions are made with strategic intent. Furthermore, centralized and balanced decisions can slowly separate Branson from the brand, making the continued success of the brand less dependent on Branson’s image and more on sound business decisions. Another suggestion is to also have a succession plan in place in the event Branson can no longer or is unable to run the business. This succession training and planning can groom the next

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leader in order to manage the organization and continue the strategic direction that Branson developed. 3) License the Virgin brand to enter new market and continue creating joint ventures One way to expand the brand globally is through licensing the Virgin brand to other companies. Licensing is a cost effective and quick way to enter new global markets. Virgin should license its brand to companies in the international markets that are reputable, that fit the company’s strategy and aspire to the Virgin’s spirit and values. The company that Virgin selects must have a proven record of quality because a poor decision can easily damage the brand’s image. The business areas in which Virgin would to license their brand might be in areas for great potential growth such as the mobile/wireless communication sector. Virgin has also great successes in forming joint ventures and they should continue to execute this strategy. Virgin should continue to pick reputable companies like Blockbuster to create joint venture in order to extend the brand, increase market shares and enter new businesses/global markets (p.44). Joint ventures allow Virgin to spread the risk and permit access to resources and capabilities that they would not be able to develop on their own (p.385).

Conclusion Through divestment of unprofitable businesses, a refocus on successful companies to increase growth, rethinking the organizational structure and licensing of the Virgin brand along with continuing to pursue joint ventures will create a stronger position for Virgin to expand into new global markets. A succession plan will ensure that Virgin’s strategy will continue to be executed and its strong corporate culture will be embodied in the new leader if the need arises.

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Reference Grant, Robert M. (2010). Contemporary Strategic Analysis (7th Edition). West Sussex, United Kingdom: John Wiley & Sons Ltd

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