Competitive Edge of Virgin Atlantic - Case Study Example

 Brief Backgrounder (Abstract) As a brief backgrounder, this business case is about Virgin Holidays which is a part of the Virgin Group owned by British billionaire businessman Richard Branson. It came about as an adjunct to the Virgin Atlantic flights between London and both Miami and New York and kept growing ever since it was launched in 1985. As a flight operator, Sir Branson saw this as an opportunity to cross-sell package tour holidays to the same customer segment – passengers who took trans-Atlantic flights on Virgin Atlantic Airways. One notable thing about the Virgin Atlantic airline is it was launched as a low-cost alternative to those bigger more-established airlines with a no-frills but superb cabin service. It is a joint venture between Sir Branson and Singapore Airlines (51% and 49%, respectively). It has 38 different sizes of aircraft available for flights to some 30 major destinations, with pending orders for 31 additional aircrafts. It has come a long way since its humble beginnings of leasing its first-ever aircraft from Aerolineas Argentinas in 1984, as it presently caters to 5.77 million passengers annually. This is a testament to its great value-for-money and excellent customer service that its clients remained loyal and gave it repeat business. Virgin Atlantic Airways was established barely six years after the Airline Deregulation Act of 1978 in the U.S. It must be borne in mind that at around this time, there was a surfeit of post-deregulation budget or low-cost airlines like the People Express. This segment was pioneered by SouthWest Airlines as early as 1971. The first year of Virgin Atlantic was profitable due to cost containment and sister-firm Virgin Holidays was launched a year later in 1985 to take advantage of synergies in the travel (airline) and hospitality (holiday tours) industries. This paper seeks how to sustain its competitive edge. Airline Industry Background (Introduction) There are two major drivers of the airline industry, the quality of service and the cost of aviation fuel. This slight digression to the airlines industry is necessary because the holiday package tour market is heavily dependent on airlines, which is the case with Virgin Holidays in relation to the Virgin Atlantic Airways. Without the airline, Virgin Holidays by itself alone would be hard put to survive in a cut-throat business where price cuts are the norm especially in a dwindling tourism market due to the current economic recession. The airlines industry is a service industry which means service delivery is crucial to customer perception. This is the key factor that determines success and profitability other than the plane ticket price. Service is an amorphous concept, “it can cover anything from the quality of food to the cheerfulness of flight attendants . . . from ease of check-in to the care taken in baggage handling, from the frequency of flights…..” (Morrison & Winston 19). This means quality service and plane fare together with the number of direct flights (plus on-time departure and arrival of each flight) are what consumers want most in an airline (after aircraft safety). The holiday package tour market is similar to the airlines industry in one respect, it is also a service industry and there is a need to manage customer expectations well. Strategy Formulation (the Aha moment) – paranoia and creativity Virgin Holidays thrived on its piggybacking strategy on the destination network of its sister-company Virgin Atlantic Airways. It has no real distinctive feature that distinguishes it from other travel agencies in the same business of offering exotic tours to far-away places. It has relied mainly on the advertising antics of its maverick president Sir Branson to generate much needed publicity. The actions of Sir Branson attracts the media due to his penchant for publicity stunts such as inviting famous people to product launchings and a cameo role in the James Bond movie “Casino Royale” but this company needs a strategy to stand on its own. Before it can craft a strategy that will differentiate it from other operators, it needs to examine first the travel industry as it is today, buffeted by numerous threats such as the swine flu epidemic, terrorist attacks, cheap on-line travel agencies that offer similar holiday tours, the rising cost of jet fuel and possible tie-ups between another airline and tour operator. The playing field had changed markedly since its launch 24 years ago and the current economic recession discouraged many people from taking holiday trips and save their money instead. For Virgin Holidays to stay competitive, it must craft its strategy based on two crucial points: paranoia and creativity. It must prepare for its nightmare moment that will change all rules of the industry and also look at its vulnerabilities. Paranoia is indeed very useful in business as what Andy Grove cited in his book (Grove 9) that only the paranoid survive. Mr. Jack Welch at GE had two aspects of his corporate strategy: the hardware part and a software part which he called as the “Software Initiatives” known as the Work-Out program and the Best Practices program (Bartlett & Wozny 4). What he emphasized in these programs is creativity and an adaptive change attitude. In the same manner, Virgin Holidays must adopt both paranoia and creativity as the core in its strategy formulation. This will give it the needed insight on what happens to the industry in the next few years and the steps it can take ahead. The next paragraphs will go into detail in examining various competitive factors that will determine its future success. The Playing Field Right Now The holiday package tour market is a crowded field composed of several players but the biggest perhaps is Expedia which was once a part of Microsoft Corporation. This firm was established on a purely Internet-based business model, which means reservations, bookings and payments are done on-line or through accredited telephone-based travel agencies. It has won several awards in the travel industry most notable of which is Most Innovative Company. The Internet has truly been a transforming force in business and in life. Today, most of travel packages are purchased on-line, beginning from inquiries, planning to actual traveling. Expedia is the world's largest on-line travel agency in the world but is only the third largest in the U.S. and the fourth largest in the world. The largest travel agency in the world is American Express (its TRS or Travel Related Services) followed by the Carlson Wagonlit Travel based in Paris, France. The third largest is Kuoni Travel Holding Ltd. which is partly owned by the giant airline, Swiss Air (had a 30% share in Kuoni which it sold later). This firm grew mostly by acquisitions and is strong in the European market (including the UK market). It embarked on a new expansionist binge focused on the Scandinavian, North American and the Indian markets. Its most distinguishing feature is the offer of customized vacation packages. The worldwide travel industry is largely fragmented with so many small-scale firms, in part due to low barriers to entry. It does not take much to set up a travel agency except tie up with an airline or cruise company and earn commissions from the sale of tickets. One thing about the industry though is there is growing consolidation among industry heavyweights. It is done through acquisitions, sometimes based on customer segment needs and geographical divisions. The logic for the acquisition is to have an end-to-end delivery system for the clients from booking, travel-related air and land transfers, hotel accommodations and actual holidays. The travel industry is largely a commodity business, with one package tour just a bit different from another tour but all promise one thing: the chance to get away from it all. It is largely a mature industry with so many players (a few big ones and hundreds of small ones). The key driver of profitability is the capacity to deliver the entire tour package in one go, that is from travel planning to purchasing airline tickets, hotel reservations, car rentals, vacation holidays, sea cruises and travel-related insurance like accident and medical coverages. This is possible if a travel agency has a worldwide distribution system in place because of its size. What the Competition Has Been Up to The last few years saw the travel industry consolidate some more, with the big firms getting bigger by acquiring the top travel agencies in major country markets. Most acquisition moves were made towards perceived growth markets such as those in the Asia Pacific regions. A few big travel operators have made moves towards acquiring properties in the most popular travel destinations by buying the hotels for their clients. This is a further consolidation move to capture a competitive edge. Other competitors have focused on certain customer segments such as the corporate travel market, the sports-oriented holiday market, scuba diving, deep sea holidays, summer holidays and winter holidays. Others have concentrated on family holiday vacations and individual quick get-aways and romantic couples for short weekend holidays. The name of the game is end-to-end delivery. Competition has concentrated on tie ups and mergers such as getting bulk hotel rate reservation prices at huge discounts that is passed on to their travel clients, global distribution systems for airline tickets and hotel reservations and thinking up of new travel packages to exotic destinations. The key is creativity which was done by Kuoni Travels when it offered the first guided tour to Egypt in 1906, the first flight chartered to Africa in 1950 and the first ever round-the-world trip back in 1977. People will be enticed to travel if the tour is something unique that clients will remember for the rest of their lives. The travel experience has to be a one-of-a-kind type of holiday trip that other firms do not currently offer in the market. Perhaps a trip to space when space travel becomes more common will be offered to space tourists. A unique experience of weightlessness is something to talk about to your family and friends. After India, the next big Asian growth market is the giant country of China where the world's oldest continuously existing civilization can still be enjoyed by Western tourists eager to re-discover the wonders of the country's culture. Many firms have looked to Asia as the next logical growth market because of its wider diversity. What Virgin Holidays Been Up to Virgin Holidays continues to expand its tour destinations by offering more exotic locales for its clients. It has recently added China as a country destination but it has only one hotel it had tied up with. This means its clients who plan to stay in other places in China will have to stay in hotels not related with Virgin Holidays and possible profits are lost to the competition. One notable thing about Virgin Holidays is its dedication to preserving the environment in the areas in which it operates. This corporate social responsibility is translated into its promised spending of US$ 3 billion over the next ten years to fund the research and development of renewable sources of energy such as wind power and solar power. The aim is to make the travel industry a sustainable growth industry for generations to come. Another is a focus on how to find effective solutions to global warming and climate change, which we all know will adversely affect tourism prospects if not checked or reversed right now. Example of this long-term side effect will be a rise in sea levels that will inundate most of the tropical island resort enclaves that tourism travel operators are very eager to push to their clients. In this regard, Virgin Holidays is far ahead of the competition when it comes to environmental concerns by cooperating with responsible tourism charities. Virgin Holidays is going the extra mile by its passion for service demonstrated through its flexible and personalized service. There are authorized Virgin Holidays representatives in all the places its clients will visit, whether hotels, island resorts, amusement parks or casinos. Its highly-trained local staff offer important tips and information about the places clients will visit and to resolve any travel-related issues quickly and satisfactorily. What irritates travelers the most are snags in their travel plans that consume their time such as delays in land transfers or flight delays. For clients, their leisure time is very valuable (Vogel 6) and these should be resolved swiftly. The firm has services for disabled travelers and also a disconnection therapy. What's Around the Corner? Perhaps the best move a competitor can do is to tie up with a mobile communications provider to carry their Web site on its clients cellular phones. This will be a marketing coup of sorts as it will reach a wider advertising audience than otherwise possible with an Internet presence. With the Internet, people have to be familiar with a web site before they will visit it either through links or by browsing but with cellular phone technologies, the marketing ads can be targeted to a precise market segment, for example, corporate travelers. This will give the competitor a leg up over the rest of the market players who rely on Internet hits for their traffic. This possible new use of an existing technology could possibly upset the current set up of most Internet-based travel operators. There are now several media channels to reach the customer and the Internet is not the only digital medium bringing about changes in traditional advertising (Masterman & Wood 305). Developments in wireless communications and the further convergence in Internet computing will allow information technologies to be stored as personal memories that can be tapped by business organizations such as travel agencies. The nightmare moment similar to what Intel's Andy Grove mentioned in his book will be the merger of the two biggest tour operators in the world today, that of American Express and Carlson Wagonlit Travel. This will create an oligopolistic market structure that allows the two players to control market pricing through economies of scale in terms of reach. Their combined geographical reach would be too much to counter as they will have a near complete stranglehold of all choice destination locations around the world. Besides the merger of big players, industry threats like another oil price hike or a highly-sensationalized terrorist attack on a group of tourists or kidnappings in a remote location could set back the tourism industry. The economic recession is showing green shoots of a tentative but jobless recovery and it will help to create demand to push oil prices up again but tend to make travel more expensive. What's The Winning Move? Unlike American Express, Virgin Holidays at present has no co-branded credit card for its clients. Having a credit card will make its present client base stick to it more because they will be granted clean credit to pay for travel vacations and enjoy other perks too, such as paying for their trip in installments. American Express became number one globally because of its credit cards business used in paying for travel expenses. Even the Carlson Wagonlit Travel had seen the necessity by unveiling a branded Visa credit card for some of its preferred accounts. What is lacking in Virgin Holidays is a co-branded credit card for its clients to use. American Express had found that loyal customers are prime candidates for an upgraded card (Reichheld 130) that increases further customer loyalty. Virgin Holidays can use credit cards to cement loyalty via a promotions program like converting card usage into flier miles and make loyal customers the company's own promoters and advertisers. Another winning move will be to break into new uncontested markets instead of old congested markets such as the usual corporate market. This will be a two-pronged strategy: a first part that will target the newly-retired members of the baby boom generation and a second part involves using new media channels to promote site awareness through social networking sites like Facebook and Twitter. Instead of focusing on market differentiation, Virgin Holidays can render the competition obsolete by concentrating on an entirely new market segment as espoused in the famous Blue Ocean Strategy book. The authors advised firms to consider the third-tier of non-customers to venture into untapped markets; that is, reach beyond existing demand (Kim & Mauborgne 101). This newly-retired senior but still actively-independent segment is money-rich with their nest eggs and lump-sum severance packages. They are also very eager to travel and take vacations after retirement. Virgin Holidays can also advertise its services via social media networks like Twitter and Facebook (Joshi, “Tweeting for Dollars”). Works Cited Bartlett, Christopher A. & Wozny, Meg. GE's Two-Decade Transformation: Jack Welch's Leadership. Harvard Business Case No. 9-399-150 (Revised May 03, 2005). Boston, MA: Harvard Business School, 2005. Grove, Andrew S. Introduction. Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company and Career (illustrated reprint). New York, NY: Currency Doubleday, 1996. Joshi, Pradnya. Tweeting for Dollars. 10 Aug. 2009. The New York Times. Accessed 18 Aug. 2009 from Kim, Chan W. & Mauborgne, Renée. Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston, MA: Harvard Business Press, 2005. Masterman, Guy & Wood, Emma H. Innovative Marketing Communications: Strategies for the Events Industry (illustrated edition). St. Louis, MO: Butterworth-Heinemann, 2006. Morrison, Steven A. & Winston, Clifford. The Evolution of the Airline Industry. Washington DC: Brookings Institution Press, 1995. Reichheld, Frederick F. The Ultimate Question: Driving Good Profits and True Growth (illustrated edition). Boston, MA: Harvard Business Press, 2006. Vogel, Harold L. Travel Industry Economics: A Guide for Financial Analysis (illustrated edition). New York, NY: Cambridge University Press, 2001. Read More