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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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