The Virgin Group of Companies - Essay Example

 Executive Summary The Virgin Group of Companies has managed to grow over the years from being a simple student magazine to mail order music retailer to one of the easily recognizable global brand names today. Despite its size, it has remained an entrepreneurial company that values innovation and risk-taking whenever an opportunity exists and wherever a market beckons. Contrary to what most business experts would opine, it has benefited from the diversity of its business lines by using synergies between related industries. Becoming a conglomerate did not make the Virgin Group lose its small business mindset which is to take calculated risks after conducting a rigorous market study on its prospective investments. Further, this small firm mentality translates into not only a constant search for innovative ideas but also to some powerful business drivers like employee empowerment and customer feedback. All of this is due to the fact Sir Richard Branson maintains a hands-on approach to management, reflected in its thin management layer, a tiny corporate board and an even tinier corporate offices. Besides having a somewhat unique business name, this group thrived on the concept of working harder to exploit certain market distortions, customer dissatisfaction and decidedly calculated risk taking. Its diverse businesses is a source of its strength, contrary to what some experts say. Having a maverick chief executive with a penchant for publicity stunts is a big help but that is not the only success factor. The diversity of its business areas allowed for synergies to be derived from related companies and nowhere is this shown concretely than in the case of Virgin Holidays in relation to Virgin Atlantic Airways. It basically catered to the same market segment – people who took flights from London to either New York or Miami. Industry Situation The global travel industry can be characterized as an oligopoly where a few market players control a big size of the industry. This is known in economic theory as C4 where the top four firms control 60% or more of an industry's total sales. In this regard, giant American Express is number one, followed by Carlson Wagonlit Travel Tours (a French company) and Kuoni Travel Holding Ltd. (a Swiss company). The fourth largest is Expedia which is entirely Internet-based, being a spin-off from Microsoft Corporation. The three largest brands above may not be household names because they have numerous acquisitions and tie ups with local firms in the countries where they operate. That unfamiliarity may mask their real clout as the four top firms practically control the huge tourism industry globally. Of course, there maybe several smaller firms too but the overall trend in the industry is consolidation through buy-out and acquisitions. The rationale for the travel industry (especially the holiday travel market) is an end-to-end delivery system, starting from inquiry, planning, hotel reservation, plane ticket, sightseeing, sports activities and the return trip. Towards this end, big travel firms are well positioned to take advantage of their wider geographical reach and global delivery systems. The worldwide travel industry can be considered as a generic product in many sense. Although anybody can offer an exotic or out-of-the-way destination, any tourism or travel holiday product can be easily duplicated by any tour operator as the industry has low barriers to entry of new players. This means another tour operator can offer essentially the same type of holiday experience that renders holiday packages more like a commoditised product. It is hard to maintain a competitive advantage for long periods when there are no differentiating factors or price advantages except through discounting. Along this line, the only competitive advantage left is the ability to deliver all the travel-related products like inquiry, planning, ticket and hotel reservations and bookings from only one vendor called vertical integration. External Environment Analysis Industry Analysis Besides intense intra-industry competition, the holiday tour market is also suffering from other adverse factors. Among these threats are terrorism, the swine flu epidemic, rising cost of jet fuel, environment degradation and global warming. Recently, the economic crisis had cut into tourism revenues deeply, with a 2% decline in tourist arrivals in the first half of this year compared to a 1.9% increase between 2007 and 2008. This has an effect on tourism stakeholders like airlines, cruise shipping companies, taxis, hotels, resorts, amusement parks, shopping malls and even land-based casinos. Some formerly pristine white-sand beaches now appear polluted and over-commercialized while the threat of global warming will inundate the favorite Pacific island nations. Due to continuing job losses and a weak economy, consumers are now reluctant to travel. There is threat of terrorism at present, where some tourists were kidnapped and even killed. Aggressive marketing can counteract these negative impressions. The start of the regular flu season starting autumn (around August-September) has put a dampener on most travel plans, as people are irrationally afraid of the swine flu epidemic. Perhaps the greatest threat to continued growth in the travel industry is the loss of some of the beautiful places to visit from environmental degradation. Once beautiful parks and clean seas are simply no longer there due to pollution and no longer appear appealing as tourist spots or destinations for holiday makers. The threat of global warming has put some holiday operators on notice that current tropical island destinations could be submerged in a few years' time. It is a problem that cannot be solved by one country alone. This requires a global effort but the tourism industry as a whole have not put a single position paper on this subject on how to deal with it. Among the few which acutely felt a deep sense of commitment is Virgin Holidays via the initiative of Sir Richard who put up several environmentally-caring initiatives such as the Virgin Unite (non-profit entrepreneurial foundation) and Virgin Green for renewable energy. Competitor Analysis Although Virgin Holidays is considered big, it is not big enough compared to the four industry giants mentioned earlier. American Express' Travel Related Services draws a large part of its revenues from a captured market – mostly cardholders of American Express credit cards and general purpose charge cards who are mostly rich individuals and corporate people and therefore have spending power. Coupled with its worldwide acceptance, better sometimes than either Visa or Mastercard, American Express' TRS (Travel Related Services) drew on this synergy to become the leading travel agency in the world. American Express' global payments system ties up nicely with the travel company subsidiary as most travelers prefer to pay using their credit cards from Amexco. Its global reach makes it ideal for multinationals to use for travel of its employees since it has a comprehensive system to keep track of travel expenses. Current number two Carlson Wagonlit Travel is headed by recently-installed American CEO Douglas Anderson who took two strategic moves lately: a co-branding tie-up with Visa Card and a push for the corporate market. It has a solid 30% of its sales coming from the public sector which is not so hard-hit by the recession unlike private firms. Its 2008 global sales reached US$27.8 billion which is a 7% increase from 2007 with $2.4 billion alone from new client bookings. That is pretty impressive considering the severity of the recession and it also proudly boasts of a 97% client retention rate (Papworth, “Crisis? What Crisis?”). On the other hand, Kuoni Travel Holdings Ltd. has an extensive travel network in 40 countries. Its specialization is customized vacation packages which started with its first-ever guided tour of Egypt back in 1906, the first chartered flights to Africa in 1950 and around-the- world tour in 1977. It is imaginative and creative when it comes to designing tour packages. Kuoni Travel is very entrenched in European markets but has expanded into North American and Indian subcontinent markets looking for new growth markets and possible acquisitions. Market Analysis The travel market is a highly-fragmented industry although it has some oligopolies in it with the further consolidation of industry heavyweights who keep seeking for advantages. It is characterized by low barriers of entry which is the reason why there so many players today. But majority of these players are small and have mostly localized operations that concentrate on either domestic tourism or international tourism (domestic tourism mixed with inbound tourism as defined by the United Nations). The package holiday tour market is considered as a commodity market with some degrees of variation with regards to high-value package tours. It cannot be considered as a sunrise industry as it has been around for quite some time and this gave rise to periods of slow or no growth at all. For consumers, there are no significant costs of switching from one travel operator to another as tours are practically the same everywhere. The proliferation of Internet use has also led to some serious price-cutting demands on tour operators. There are numerous on-line sites that offer package tours to practically any place a customer wants, the only hindrance having the patience and the time to surf the Web to look for great price deals. The rise of e-commerce has already pervaded the travel industry with most operators putting up a digital presence that offers a wider target audience for their advertising messages. This on-line presence has only intensified the degree of competition with some operators offering extremely low prices such as last-minute deals to vacationers. Although the Internet has widened the potential market for travel services by opening up other sectors, it has also put a downward pressure on tour prices unless the operator has a compelling proposition to offer its clients for premium pricing such as personalized service or an exclusive lock on a certain exotic destination. This new digital medium of doing business has benefited clients the most, by offering them comfort and convenience of planning their itineraries from the home or office. It has made clients more demanding as it is interactive. Internal Environment Analysis Virgin Holidays started in 1985, a year after the Virgin Atlantic Airways was launched. Virgin Atlantic was launched in response to the Airline Deregulation Act of 1978 that opened up the airline industry to new entrants which saw the proliferation of budget or low-cost fares based on no-frills cabin service. The business group saw an opportunity in the ensuing market turmoil as bigger airlines struggled to compete with more nimble but smaller airlines. Long before the concept of cross-selling came into vogue in business schools, Virgin Holidays was an innovative way to sell package holiday tours to the same market segment – passengers who took Virgin Atlantic Airways flights. Both Virgin subsidiaries actually complemented each other, being in the same category of the travel industry. The original target market were the business travelers who frequently fly out to New York or Miami from London's airports. It is much easier to sell holiday vacations to these same group of customers who already found the Virgin Atlantic service to be value for their money. Why not sell holidays to them as well? Starting from corporate accounts and summer holidays, Virgin Holidays now caters to different market segments such as family vacations, individual quick trips and also romantic couple getaways to exotic and exclusive resort islands and beaches. The company now offers all types of tours too, no longer confined to the summer season but winter holidays as well. It has moved to diversify its target market but with no particular focus on one specific segment that would differentiate it from other travel-related tourism industry operators. Its positioning strategy was to capitalize on the iconic Virgin brand name. Its original holiday destinations were just an extension of its London-Miami route and added connecting flights to Caribbean tropical resorts. Its marketing proposition is total customer satisfaction through value added holiday vacations that promise pure enjoyment by offering disconnection therapy before the clients will even depart from their homes. Its marketing mix is focused on low pricing. Virgin Holidays started in the travel business practically from scratch and grew by the expertise of its own people. Other than that, it relies mostly on the local staff of its destination places to provide most of the legwork and information needed by the visitors. As mentioned previously, it is easy to package a holiday tour if one has knowledge of good places to visit and then work backwards to arrive at a correct pricing level. It can be said Virgin Holidays is already experienced in this regard. With regards to segmentation, the company has not done a really good job with precisely targeting its most profitable market segment. With American Express TRS and Carlson Wagonlit Travel, both firms concentrated their marketing efforts on the corporate market which is the most profitable segment. Virgin Holidays has adopted a “shotgun approach” with no clear demarcation lines as to which segment it should focus on. Instead, it has all sorts of holidays to choose from such as ski, package, spa, tour, shopping, family, Disney, beach, romantic and practically everything else. The marketing strategy of the company can be best described as “coarse marketing” defined as gut-reaction and instinctive management, reacting to competitor moves by innovation and adaptation. It must endeavour to craft a masterful marketing strategy anchored on the valuable unique Virgin franchise. Despite being innovative, the Virgin Group is implementing a “follower strategy” in almost all the businesses it is in, whether in mobile telephony, airlines, financial services, cola drinks, book publishing or travel-related services. It can be noted that Virgin companies are not dominant players in whatever type of business they are in. It is more like a niche player in each area where it operates and this reality of being a bit player greatly defines its corporate philosophy of innovation by exploiting the weaknesses of what it calls as “dinosaurs” in the business. The Virgin Group cannot be considered a pioneer in areas it had chosen to invest in, reason it always tries harder. Its marketing mix relies heavily on two aspects: low pricing and advertising promotions as product and place are not very relevant with regards travel industry. Conclusions The travel industry requires heft and size for effective end-to-end delivery, from initial planning of the trip to booking and reservations and everything related to travel including the requisite accident and medical insurance coverages. This is the reason why even the biggest firms are continuously adding to their portfolios by mergers and acquisitions and expanding to new growth markets like India and China. Virgin Holidays cannot be considered as a market leader in the travel industry and it also lacks some strategic alliances necessary for success. It does not have much forward integration with regards to accommodations at its destinations like what Carlson Wagonlit Travel did by buying up hotel properties in its favourite places. It is worldwide capability that drives profitability in this industry and the big operators have the technical and financial muscle to deliver all products from one palm, so to speak, such as the planning, ticket purchases, transfers by land, sea and air, car rentals, insurance products, hired tourist guides, language interpreters and sea cruise holidays. Any firm that can do all this in a single platform will profit from the efficiencies it can squeeze along each value chain. Virgin Holidays should try to emulate the two biggest travel firms by having a credit card for its travelling clients. American Express has a large card base and Carlson Wagonlit is on the way to co-brand its own card with Visa. For Virgin Holidays, it is not that difficult as it is just a small step forward from its financial services subsidiary, Virgin Money. It can utilize synergy to co-brand its own credit card with either Visa or MasterCard. Its Velocity Rewards card can be used as a credit card if it wants to make its customers stay with the firm forever. Virgin Holidays should look towards a new market to enter such as China. At present, it has few hotel tie ups there and only two destinations, Beijing and Shanghai. On the other hand, it should try out new market segments such as the newly-retired pensioners who have money to spend and time for leisurely travel to reach beyond existing demand (Kim & Mauborgne 101). Works Cited Papworth, B. “Crisis? What Crisis?” The Buying Business Travel Magazine. The Interview. (May – June 2009). Accessed 20 August 2009 from http://www.carlsonwagonlit.com/export/sites/cwt/en/global/news_and_media/cwt_in_the_media/print/cwtpress/200905_interview_anderson_bbtm_en.pdf 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. Read More