richard branson and the virgin group of companies in 2007 analysis.pdf
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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.
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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.
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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 “cross-
subsidize 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
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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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