Virgin Atlantic Airways Essay

1 Executive summary

“Virgin” is currently the third most recognized brand in Britain and it is commonly associated with the identity of its founder Richard Branson. Branson is not your typical corporate businessman but rather a risk-taking entrepreneur that emphasizes the fun in every activity he is driving the Virgin group into. Virgin’s best known operations are probably air travel (the Virgin Atlantic and Virgin Express airlines) and music stores (Virgin Megastores), but they are also involved in trains, finance, internet services, soft drinks, mobile phones, cars, wines, publishing, and bridal wear to name but a few. Although Virgin has successfully developed a differentiation strategy in each of these sectors, some of the group’s companies are currently experiencing financial difficulties.

Through a SWOT analysis, we identified four main strategic issues that will determine Virgin’s future success:

*Leadership – how to foster a new Branson that will be able to lead Virgin trough its new challenges?

*Globalisation – how to leverage the Virgin brand recognition in the UK to an international one?

*Reorganization – how to organize such a large number of different companies with different business focus?

*Financial structure – how to structure the company’s capital for an optimal return on investment?

Following a through analysis, using tools such as “the BCG matrix”, leadership model analysis and Internet analysis, we concluded that in order to survive, the Virgin brand has to become global. We believe that building a leading worldwide Internet portal, giving access to all Virgin’s business, is critical both for globalizing the brand and for managing the different business trough one platform. Furthermore, we believe that Virgin should finance its expansion to the electronic commerce by raising money in the capital markets trough an initial public offering of its shares.

2Project background

“Virgin” is the third most recognised brand in Britain today (Virgin.com website), and also has a significant and growing brand identity around the entire world. The Virgin group’s brand identity is synonymous with the identity of the group’s founder, Richard Branson, who has become famous for challenging business tradition both personally and through his company’s activities.

Sir Richard Branson, as he is now known, remains in charge of the sprawling Virgin group. He is infamous for his adventurous exploits and publicity stunts, the most daring being his attempt to be the first to circumnavigate the world in a hot air balloon. This particular goal was not achieved, but both Branson and Virgin gained significant worldwide publicity from the several unsuccessful attempts. Branson is not your typical corporate businessman – he is rather recognised for his woolly jumpers, beard and toothy grin.

He is neither the typical tycoon – but rather honest, unstuffy, nice even. But these impressions belie a hugely successful entrepreneur and businessman. Branson’s strategy that he calls ‘branded venture capital’ (The Economist, 17-02-2001) puts forward the Virgin name and minimal capital. To date, wealthy partners have provided the bulk of the cash, whilst the Virgin brand is exchanged for a controlling interest in the new enterprise.

The name of the Virgin group hails from the original discount mail order record company. One of the initial popular contenders was ‘Slipped Disc’, but one of Richard Branson’s girl student colleagues suggested ‘what about Virgin? We’re complete virgins at business. ‘And there aren’t many virgins left around here’ laughed one of the other girls. Branson adopted the name on the spot (http://www.millservices.co.uk/ richardbranson.html).

Some interesting quotes from Sir Richard Branson that sum up the Virgin approach, brand and ethos include:

“We look for opportunities where we can offer something better, fresher and more valuable, and we seize them. We often move into areas where the customer has traditionally received a poor deal, and where the competition is complacent.”

“I want Virgin to be as well-known around the world as Coca-Cola.”

“We are a people brand and a people business in the purest sense of the word”

Virgin is an interesting company to study in order to gain a better understanding of how Richard Branson is continuing to achieve such apparent success through marketing and developing his unique Virgin brand. It is estimated that if Branson’s stakes in the various companies were put on the public markets today, they would be worth approximately $3 billion (Time Magazine, 5 March 2001). Since Virgin has such a diverse range of businesses and international activities, the company presents a challenging study in seeking to understand the overall Virgin strategy, critical success factors and why specific Virgin companies were launched. Also of interest are some of Virgin’s rare failures and apparent present difficulties. The choice of Virgin as a target company presents additional challenges since it is not a publicly listed company, and consequently there is a limited amount of thorough facts and analysis available.

The overall project objective is to gain an understanding of what Virgin’s future strategic options might be and conclude with our considered final strategic recommendations.

3Company and industry background

The Virgin group of companies have a very strong brand name in Britain and is, according to Virgin’s website, also “now becoming the first global brand name of the 21st Century”. Virgin’s best known operations are probably air travel (the Virgin Atlantic and Virgin Express airlines) and music stores (Virgin Megastores), but they are also involved in trains, finance, internet services, soft drinks, mobile phones, cars, wines, publishing, and bridal wear to name but a few. In total, Virgin has created over 200 companies worldwide, currently employing over 25,000 people. The total revenues of the Virgin group in 1999 exceeded US$5 billion (www.virgin.com/about/about.jsp)

The Virgin companies are generally service providers, i.e. they provide some kind of service to consumers such as travel or other services. Many of these services are available via the Internet. All the various Virgin companies are linked by the values of the Virgin brand and the attitude of the employees. Virgin competes in some of the most established and competitive industry sectors, such as air travel, financial services and mobile phone networks. Yet it has successfully developed a differentiation strategy in each of these sectors, attracting loyal custom and thus achieving success. However, very recently some of the Virgin companies are experiencing financial difficulties.

The following is a brief review of some of the major Virgin companies:

Virgin Atlantic Airlines: Virgin Atlantic, the first venture of Richard Branson outside the record business, started in 1994 challenging the established airline companies like British Airways flying cross Atlantic. It achieved steady growth during the 1980’s and became one of the most profitable airlines during those years. With the sale of Virgin Records in 1992, fresh money was brought in to secure further expansion. Routes to Asia were added. At the end of 2000, Singapore Airlines took a stake of 49% in Virgin Atlantic for GBP 600 million. Virgin Atlantic is the sixth biggest cross Atlantic carrier with a total turnover of 1 billion GBP. It is one of the best-known Virgin companies (The Economist, 23-12-1999).

Virgin Express Airlines: Virgin Express Airlines started in 1996 with the acquisition of the low cost Belgian Airline EBA. Virgin Express is a low cost low fare airline. The main hub is Brussels and all destinations are within Europe. In 1997, Virgin Express was floated on the Brussels stock exchange and has been under performing tremendously with the stock falling two-thirds since the introduction. Virgin Express has generated hardly any profit since its foundation and is still loss making. In 1999 Virgin Express Ireland was founded to avoid strict Belgian labour laws and high costs.

Virgin Blue: This is the newest Virgin Airline company operating in Australia as a low cost airline. It started in 2000 with five Boeing 737-400 airplanes. The start had a setback due to the increase in oil-prices, devaluation of the Australian Dollar and the competitive strengths of Quantas and Ansett, the two other Australian airlines. The plan to make a loss for three years will probably be overtaken by reality, making the time to get the first profit probably longer (Business Week, 2000). Virgin Blue is gambling on the surge in Australian air travel for this future profitability.

Virgin Rail: Virgin entered the UK privatised rail industry with Virgin Rail launched in 1997. It consists of 20-year franchises to operate two UK railway networks:

*CrossCountry – a series of routes that traverse the UK.

*West Coast – the main route from London to Glasgow.

These franchises were awarded to Virgin by competitive tendering following the privatisation of the British Rail network. Virgin is a train operator (rolling stock, ticketing offices, staff) whereas the tracks, signalling and stations are owned and operated by Railtrack, overseen by the government regulatory body – the Strategic Rail Authority. In 1999, Virgin Rail split its equity to incorporate a 49% holding from Stagecoach, a privately owned bus company. Virgin’s reputation in the rail industry has been mixed. It has suffered from poor public relations including complaints regarding dirty trains, delays, and poor food.

Customer numbers have also decreased recently in the aftermath of the Hatfield crash and the repairs required to the railway lines that have resulted in significant disruption and delays to services. Virgin Rail has attempted to win back customers through half-price ticket schemes, but the difficulties in even purchasing such tickets has initially led to further complaints. Virgin’s goal to turnaround the rail service delivery concept is a definite challenge in a traditionally difficult sector. The business challenge is even greater given the complexity of the rail business environment and regulations, and profitability is likely to remain a distant goal.

Virgin Drinks: The developments of Virgin Cola as well as other drinks reflect the overall patterns of making business in Richard Branson’s empire. Back in 1994 the British market of cola’s was dominated by major players, worldwide brands whose position seemed to be untouchable and one could only imagine the inner battles of that preoccupied segment. Nevertheless, Virgin Cola and its related flavours have met with extraordinary success in the United Kingdom and many countries in Europe and Asia. In many instances Virgin® has risen to the number two selling soft drink line-up in the market (Desalvo, 1998)

Over the past five years Virgin Cola has grown significantly in the UK and internationally. They have demonstrated an ability to compete aggressively in other drinks segments too, and the name has been changed to Virgin Drinks to reflect this growth. The turnover ranges about GBP 300 million, which is really significant for the new entrant.

Recently it was agreed with Cott, the initial partner company, to buy out its interests to enable Virgin to pursue more radical and innovative marketing techniques synonymous with the Virgin brand. (Marketing Week, 16-03-2000) The company subsequently opened a brand new concentrate manufacturing plant in Ireland with the capacity to produce concentrate for 1 billion litres of cola a year. Last year TV advertising campaign generated an awareness of 36 percent among teens, which was higher than Pepsi’s awareness over the same period and equals to Coke’s. Though recent household penetration figures show Virgin’s British market share at 7.4% compared with Pepsi’s 13.4% and Coke’s 30.6%, which provoked some critique to blame Virgin of failure, the other figures and facts show the company is still gaining significant market share. (Marketing Week, 30-03-2000)

Since its launch in the US in 1998, Virgin has won less than 0.1 percent of the US drinks market, according to industry newsletter Beverage Digest (Fischer, 1998). As a representative of Atlantic Beverage, one of the Virgin’s distributors, said recently: ‘we are not going to take out Coke and Pepsi. They are the gold standards, but Virgin is the standard for fun and taste, there is a room for everybody’.

Radio Free Virgin: is a web based technology that turns a user’s computer into the world’s best digital radio tuner, Radio Free Virgin uniquely combines music and technology to bring consumers the highest quality music content available via digital distribution. Radio Free Virgin’s state-of-the-art, CD-quality streaming audio combines the company’s proprietary application software (available by download free of charge at www.radiofreevirgin.com) and innovative, original music channels programmed by well-known artists, celebrities, musicologists and DJs from around the world. Since the radio was launched, over one million listeners downloaded Radio free virgin.

In the past three months, downloads of the Radio Free Virgin player have increased more than 3000 percent, time spent listening has more than doubled and the content offerings have expanded from 24 to over 40 music channels (PR Newswire, 17-01-2001). Recent content partnerships including the Grammy Foundation, Playboy, music.com, soul24-7, V2 Records and others, provide free access to high quality, digital music that fans applaud as the best online listening experience available.

Virgin Mobile: This is a 50:50 joint venture company between Virgin and Deutsche Telecom (One 2 One) and is the UK’s first mobile virtual operator. It also sells mobile phones. Virgin Mobile is now established as the most successful virtual network operator in the world. Since its launch in November 1999, it has attracted over 750,000 customers, making it one of the fastest growing mobile phone companies ever (PR Newswire, 20-02-2001). Virgin has already taken the brand overseas with Virgin Mobile (Australia), a partnership with Cable and Wireless Optus; and Virgin Mobile (Asia) a joint venture with Singapore Telecom. Virgin Mobile is deploying InfoSpace’s wireless technology platform and suite of services to promote the Virgin Group’s global expertise in the fields of entertainment, leisure and travel.

The launched offerings include “Music Services”, such as music news, charts, event listings, and releases; “Going Out” and “Staying In” services, featuring movie news and guides, new releases, recommended event venues, and new video and DVD releases to buy; “Sports Services,” featuring European football, rugby, cricket, and golf; “Travel Services,” including last-minute travel deals; and, mobile horoscope and lottery offerings. All of the services are customisable, enabling Virgin Mobile’s users to receive personalized local data, based on their preferences and profiles. In addition, the integration of InfoSpace’s communication services suite allows Virgin Mobile’s customers to send and receive e-mail messages, and access personal information from an electronic address book, calendar and to-do list.

Virgin.com: (www.virgin.com) is the Virgin portal and gateway to all Virgin online businesses. Branson spent $225 million in developing Net business and services. The Virgin.com site is a giant with 2 million visits per month after less than a year of operations. It ranks as the 12th most popular Web destination in the UK (Business Week, 22-01-2001); has a joint development, technology licensing and sales and marketing activities with Bright Station and solutions backed by Intel’s technology backbone. With the rapid growth of Virgin’s products and services, Virgin.com recognized the need to deploy solutions to serve the Virgin business and take advantage of the full brand potential.

The enhanced Virgin.com portal will be featured in Virgin V.Shops as well as online. Virgin.com records about 22 million visits per year; the company online sales totalled US$ 216 millions in 2000 (from about US$ 5.2 billion total Virgin sales). Online sales include about US$ 53 million worth of airline tickets, 180,000 virgin mobile phones and US$ 3 millions worth of wine sales. Virgin direct financial services include one million customers and over US$ 4 billion in assets..

Just as Virgin’s Bricks & mortar business, the virtual business portfolio covers everything from train and plane tickets to electricity bills. Some examples are:

Thetrainline.com- joint venture with British transport company Stagecoach. The site sells tickets for Britain’s 23 train operators, has 2.1 million users and is adding 55,000 new ones each week (Business Week, 2001).

VirginEnergy- 5,500 London households paying gas and electricity bills online since July 2000

Virgin Cars- 2,000 cars sold online since June. This is a virtual showroom, where consumers can compare models before buying at a price 17% cheaper than traditional dealerships. Customers get maintenance and can arrange financing as well as sell their existing cars online.

Virgin Direct- 1 million customers using financial service for managing $4 billion in assets including

insurance, mortgage and investment funds

Virginwines.com- $58,000 worth of wine sold per week online

Virgintravelstore.com – One can book everything from airline flights to hotel rooms to guided tours from a

wide selection of travel companies, including Virgin.

Figure I: The Boston consulting group’s Growth-Share Matrix

We can conclude that some businesses are cross subsidised by the travel and Megastores businesses. The variety of offerings covers an entire lifestyle and many businesses are complementary, such as Virgin travelstore.com and travel businesses.

4Identification of the objectives of Virgin and the problems confronting the company

One of the main objectives of Virgin at this moment is developing its net-business. Other objectives would be to bring order into the Virgin conglomerate of very diverse businesses, which could be achieved by developing the net-business. The last objective is the further expansion of the brand to turn it into a truly global brand.

In achieving these objectives, a number of problems arise. Both external and internal strategic analyses are required to fully establish these problems as well as the opportunities facing Virgin. Issues that we consider relevant include:

*Has Richard Branson spread his unique brand too far? (i.e. brand dilution). What is Virgin’s value proposition? What does the brand stand for and what is its business model?

*Will the group diversity mean less expertise and hinder the competitiveness of individual businesses in globally competitive markets?

*Is the company brand and culture too dependent on Richard Branson himself (what would happen if he departed/retired)?

*What is the group’s future strategy? How can they leverage information and communication technology advancements to provide competitive advantage? Where are they in relation to their main competitors?

*How can Virgin leverage its brand and competencies to achieve global business success?

*How can the company best position itself for the future?

5Strategic Analysis

For the strategic analysis, a SWOT analysis has been used to determine what are the strengths, weaknesses, opportunities and threats that the company as a whole is facing. In-depth analysis has been performed on the leadership and brand, two main drivers of Virgin’s success to date. Further analysis has been done on the Internet where Virgin is focussing its present attention.

5.1 SWOT ANALYSIS

Virgin Strengths:

Virgin has the following main strengths:

1.Strong brand recognition: The Virgin brand name is one of the most recognized brand names in the UK, but also well known in other important markets like Europe and the USA. In a recent Financial Times/PriceWaterhouseCoopers’ survey (Financial Times, 2000) of the world’s most respected companies, Virgin was placed 28th.

2.Personal reputation and image of Richard Branson: Branson has a very good understanding of handling the media, strong negotiation skills and strong charisma. He is well respected for his unorthodox approach to business. He achieved 5th place this year in the Financial Times survey on the world’s most respected CEO’s (Financial Times, 2000). Being a “celebrity”, he is easily able to get access to the right people and obtain partnerships or alliances when needed.

3.Strong and positive perceived values of the brand: The Virgin brand’s perceived values include: Value for money, quality, innovation, fun and sense of competitive challenge. The Virgin brand is particularly strong in its home UK market. Branson is well aware that a good brand travels and that the brand elasticity is infinite.

4.Company structure and culture: The Virgin companies have an entrepreneurial spirit whilst minimizing bureaucracy. It is a cluster of loosely associated companies instead of a hierarchical company. Branson acts as a back seat leader, encouraging people to use their creativity and welcoming good ideas. The culture is one of “make work fun” and informality.

5.Experience in penetrating a number of diverse industries: Virgin has penetrated a large number of very diverse industries, from the music industry, airline industry to the telecom industry and on-line car selling. In themselves these industries are unrelated, yet Virgin has penetrated each of them with great or reasonable success.

6.Strong in establishing partnerships: Virgin has been able to enter new industries by establishing good partnerships. In the drinks business, this was for example done with the Canadian company Cott, in the Rail business with Stagecoach and in the insurance business with AMP (the Australian Mutual Provident Society).

7.Strong in strategy and tactics: When entering an industry, Virgin attacks the dominant companies, playing strongly the ‘David’ against the industry’s ‘Goliaths’. It carefully picks its battles trying to hit the Goliaths where it hurts. In the mean time, Virgin is proactive and quick to act, avoiding paralysis by long analysis. The company uses joint ventures or other partnerships to leverageexpertise. Virgin isn’t afraid to make mistakes in order to learn.

Virgin Weaknesses

Virgin has the following main weaknesses:

1.Loss making businesses: Most of the Virgin companies are loss making excluding Virgin Atlantic, the Virgin holiday companies and Virgin Rail (thanks to subsidies) (The Economist, 23-12-1999). Virgin has been forced to sell profitable businesses or parts of them to safeguard other ventures. This happened in 1992 with the sale of Virgin Records to safeguard Virgin Atlantic, and with the sale of a 49% stake in Virgin Atlantic to Singapore airlines to safeguard the Music retail business.

2.Vulnerability of the business to the brand image: Virgin has a ‘No bankruptcy’ policy for its almost 200 legally separate companies. To avoid damage to the Virgin brand and Branson image, the bankruptcy of any Virgin company is avoided at any cost. Unprofitable businesses are kept going.

3.Bad reputation with investors: Virgin companies that are floated are under performing tremendously. The clearest example is Virgin Express, whose
shares trade at a fraction of the original introduction price. The Virgin Group was floated in 1986, but subsequently withdrawn from the stock market in 1987 when its share prices were slashed.

4.Late entry to e-business: Richard Branson recognizes he was very late in entering the e-business. He has already spent more than $225 million to develop the net business and services and is now planning to spend another GBP 100 million (Business week, 22-01-2001), mainly to catch up.

5.Dependence on Richard Branson: Richard Branson is in fact a private, branded entrepreneur. This makes the Virgin company unique but also very vulnerable. Branson’s reputation is closely linked to the Virgin company reputation, thus if he were to tumble, the Virgin brand would also tumble. As they are so closely linked, the risk is also high should Richard Branson abruptly depart or die. There could be crisis of confidence, which could endanger the survival of Virgin.

6.Diversity: The Virgin conglomerate contains a huge number of businesses and joint ventures ranging from Vodka to Airlines and wedding dresses. The only synergy between the companies is the brand name. Therefore the corporate management expertise is spread very thin and diluted, which might cause under performing of the business. It may also result in a lack of strategic focus within the company.