CASE STUDY: THE VIRGIN GROUP

Introduction

The Virgin Group is one of the UKs largest private companies. The group included, in 2006, 63 businesses as diverse as airlines, health clubs, music stores and trains. The group included Virgin Galactic, which promised to take paying passengers into sub-orbital space. The personal image and personality of the founder, Richard Branson, were highly bound up with those of the company. Bransons taste for publicity has led him to stunts as diverse as appearing as a cockney street trader in the US comedy Friends, to attempting a non-stop balloon flight around the world. This has certainly contributed to the definition and recognisability of the brand. Research has showed that the Virgin name was associated with words such as fun, innovative, daring and successful. In 2006 Branson announced plans to invest $3bn (A2.4bn; 1.7bn) in renewable energy. Virgin, through its partnership with a cable company NTL, also undertook an expansion into media challenging publicly the way NewsCorp operated in the UK and the effects on British democracy. The nature and scale of both these initiatives suggests that Bransons taste for his brand of business remains undimmed.

Origins and activities

Virgin was founded in 1970 as a mail order record business and developed as a private company in music publishing and retailing. In 1986 the company was floated on the stock exchange with a turnover of 250m (A362.5m). However, Branson became tired of the public listing obligations: he resented making presentations in the City to people whom, he believed, did not understand the business. The pressure to create short-term profit, especially as the share price began to fall, was the final straw: Branson decided to take the business back into private ownership and the shares were bought back at the original offer price.

The name Virgin was chosen to represent the idea of the company being a virgin in every business it entered. Branson has said that: The brand is the single most important asset that we have; our ultimate objective is to establish it as a major global name. This does not mean that Virgin underestimates the importance of understanding the businesses that it is branding. Referring to his intent to set up a green energy company producing ethanol and cellulosic ethanol fuels in competition with the oil industry, he said, Were a slightly unusual company in that we go into industries we know nothing about and immerse ourselves. Virgins expansion had often been through joint ventures whereby Virgin provided the brand and its partner provided the majority of capital. For example, the Virgin Groups move into clothing and cosmetics required an initial outlay of only 1,000, whilst its partner, Victory Corporation, invested 20m. With Virgin Mobile, Virgin built a business by forming partnerships with existing wireless operators to sell services under the Virgin brand name. The carriers competences lay in network management. Virgin set out to differentiate itself by offering innovative services. Although it did not operate its own network, Virgin won an award for the best wireless operator in the UK. Virgin Fuels appears to be somewhat different in that Virgin is putting up the capital and using the Virgin brand to attract attention to the issues and possibilities that the technology offers.

In 2005 Virgin announced the establishment of a quadruple play media company providing television, broadband, fixed-line and mobile communications through the merger of Bransons UK mobile interests with the UKs two cable companies. This Virgin company would have 9 million direct customers, 1.5 million more than BSkyB, and so have the financial capacity to compete with BSkyB for premium content such as sports and movies. Virgin tried to expand this business further by making an offer for ITV. This was rejected as undervaluing the company and then undermined further with the purchase of an 18 per cent share of ITV by BSkyB. This prompted Branson to call on regulators to force BSkyB to reduce or dispose of its stake citing concerns that BSkyB would have material influence over the free-to-air broadcaster.

Virgin has been described as a keiretsu organisation a structure of loosely linked, autonomous units run by self-managed teams that use a common brand name. Branson argued that, as he expanded, he would rather sacrifice short-term profits for long-term growth of the various businesses. Some commentators have argued that Virgin had become an endorsement brand that could not always offer real expertise to the businesses with which it was associated. However, Will Whitehorn, Director of Corporate Affairs for Virgin, stated, At Virgin we know what the brand means and when we put our brand name on something we are making a promise. Branson saw Virgin adding value in three main ways, aside from the brand. These were their public relations and marketing skills; its experience with greenfield start-ups; and Virgins understanding of the opportunities presented by institutionalised markets. Virgin saw an institutionalised market as one dominated by few competitors, not giving good value to customers because they had become either inefficient or preoccupied with each other. Virgin believed it did well when it identified such complacency and offered more for less. The entry into fuel and media industries certainly conforms to the model of trying to shake up institutionalised markets.

Corporate rationale

In 2006 Virgin still lacked the trappings of a typical multinational. Branson described the Virgin Group as a branded venture capital house. There was no group as such; financial results were not consolidated either for external examination or, so Virgin claimed, for internal use. Its website described Virgin as a family rather than a hierarchy. Its financial operations were managed from Geneva. In 2006 Branson explained the basis upon which he considered opportunities: they have to be global in scope, enhance the brand, be worth doing and have an expectation of a reasonable return on investment. Each business was ring-fenced, so that lenders to one company had no rights over the assets of another. The ring-fencing seems also to relate not just to provision of financial protection, but also to a business ethics aspect. In an interview in 2006 Branson criticised supermarkets for selling cheap CDs. His criticism centred on the supermarkets use of loss leading on CDs damaging music retailers rather than fundamentally challenging the way music retailers do business. Branson has made it a central feature of Virgin that it shakes up institutionalised markets by being innovative. Loss leading is not an innovative approach. Virgin has evolved from being almost wholly comprised of private companies to a group where some of the companies are publicly listed.

Virgin and Branson

Historically, the Virgin Group had been controlled mainly by Branson and his trusted lieutenants, many of whom had stayed with him for more than 20 years. The increasing conformity between personal interest and business initiatives could be discerned in the establishment of Virgin Fuels. In discussing his efforts to establish a green fuel company in competition with the oil industry Branson made the geopolitical observation that non-oil-based fuels could avoid another Middle East war one day; Bransons opposition to the Second Gulf War is well publicised. In some instances the relationship between personal conviction and business interests is less clear cut. Bransons comments on the threat to British democracy posed by NewsCorps ownership of such a large percentage of the British media could be depicted as either genuine concern from a public figure or sour grapes from a business rival just been beaten out of purchasing ITV.

More recently Branson has been reported as talking about withdrawing from the business which more or less ran itself now, and hoping that his son Sam might become more of a Virgin figurehead. However, while he was publicly contemplating this withdrawal from business, Branson was also launching his initiatives in media and fuel. Perhaps Bransons idea of early retirement is somewhat more active than most.

Corporate performance

By 2006 Virgin had, with mixed results, taken on one established industry after another in an effort to shake up fat and complacent business sectors. It had further set its sights on the British media sector and the global oil industry. Airlines clearly were an enthusiasm of Bransons. According to Branson, Virgin Atlantic, which was 49 per cent owned by Singapore Airways, was a company that he would not sell outright: There are some businesses you preserve, which wouldnt ever be sold, and thats one. Despite some analysts worries that airline success could not be sustained given the cyclical nature of the business, Branson maintained a strong interest in the industry, and included airline businesses such as Virgin Express (European), Virgin Blue (Australia) and Virgin Nigeria in the group. Bransons engagement with the search for greener fuels and reducing global warming had not led him to ground his fleets. but rather to prompt a debate on measures to reduce carbon emissions from aeroplanes. At the beginning of the twenty-first century the most public problem faced by Branson was Virgin Trains, whose Cross Country and West Coast lines were ranked 23rd and 24th out of 25 train-operating franchises according to the Strategic Rail Authoritys Review in 2000. By 2002 Virgin Trains was reporting profits and paid its first premium to the British government.

The future

The beginning of the twenty-first century also saw further expansion by Virgin, from airlines, spa finance and mobile telecoms in Africa, into telecoms in Europe, and into the USA. The public flotation of individual businesses rather than the group as a whole has become an intrinsic part of the juggling of finances that underpins Virgins expansion. Some commentators have identified a risk with Virgins approach: The greatest threat [is] that . . . Virgin brand . . . may become associated with failure. This point was emphasised by a commentator who noted that a customer who has a bad enough experience with any one of the product lines may shun all the others. However, Virgin argues that its brand research indicates that people who have had a bad experience will blame that particular Virgin company or product but will be willing to use other Virgin products or services, due to the very diversity of the brand. Such brand confidence helps explain why Virgin should even contemplate such risky and protracted turnaround challenges as its rail company. Sarah Sands recounts that Bransons mother once proudly boasted that her son would become Prime Minster. Sands further commented that she thought his mother underestimated his ambition. With Virgins entry into fuel and media and Bransons declarations that he is taking on the oil corporations and NewsCorp, Sands may ultimately prove to have been prescient in her comment.

Questions

1. What is the corporate rationale of Virgin as a group of companies?
2. Are there any relationships of a strategic nature between businesses within the Virgin portfolio?
3. How does the Virgin Group, as a corporate parent, add value to its businesses?
4. What were the main issues facing the Virgin Group at the end of the case and how should they be tackled?