Strategic Management Perspectives: Decision Making at Virgin Group - Case Study Example

Running Header: Business Case Analysis for Virgin Group Page Business Case Analysis for Virgin Group Harvard Style 28 August 2006 1.0 Introduction The famous adage that “the only constant thing in this world is change” is true even in the business landscape. Business organizations are often faced with challenges which call for strategic changes. These changes are often in response to the different factors and variables in the companies’ external environment. As evidenced by various real world examples, firms often adopt to threats and opportunities in their respective surroundings by modifying their strategies. This can include introduction of new products, conquering new markets, revamping the value chain, coming up with a new pricing strategy and others. The history and milestones of Virgin Group (Virgin) is a portrait of how companies make strategic decisions in response to change. In a lot of situation, we can see the company’s management altering the course of the business operations. However, it is notable that all the changes in Virgin is in direct response to new opportunities and threats. This report will look at the major strategic changes at Virgin Group as well as their respective motives and impact. The first section will give a brief description of Virgin. In order to fully evaluate the scenarios where strategic changes are made, this paper will draw insights from the different theories and principles in strategic management. The use to these tools and techniques is expected to give an accurate account of how the company comes up with its various decisions. The paper will conclude with its findings. 2.0 Virgin Group: A Brief Company Profile The origins of Virgin Group can be directly traced to the Richard Branson’s foremost business endeavor in 1968, the Student Magazine. In its pursuit of saving the magazine from financial crisis, Branson ventured into selling music records which were then significantly overpriced. From this humble beginning, the company has risen to integrate 24 businesses (as of 2000) where the major lines are Virgin Travel, Virgin Atlanta, Virgin Entertainment, Virgin Holidays, Virgin Retail, Virgin Express Holdings, Virgin Direct, Virgin Direct Personal Finance, Virgin Rail, V2 Music, and Virgin Net. How the company which started as a mail order operation venture into these diverse business operations is a direct result of the strategic changes that Virgin has decided to embark in. The firm had really explored uncharted waters as it recognizes various business opportunities in other markets. The first decision which signaled the company’s willingness to go into other business lines was its move to establish Virgin Retail from its mail order operation. 3.0 From Mail to Retail In 1971, the company was pressured to seek a new way of distributing its products. This dilemma was triggered by the national postal strike which plagued the whole nation. It can be seen that this event significantly threatened the firm into bankruptcy. Recognizing that Virgin needs a distribution system apart from mail ordering, Branson opted to establish a physical distribution system. Virgin rented space where clients can visit and buy records. In this decision, the company exposed itself into new challenges. It should be noted that in terms of marketing, mail order operation only requires tailoring significant strategies for the three Ps—product, promotion, and price. The creation of distribution outlet necessitates a strategic decision on the other P which is place. Basic marketing tells us that in order to efficiently market a product, companies should strike a balance among the different factors in the marketing mix. Thus, the place where Virgin’s customers pick up their favorite records should compliment the products sold, the promotion launched, and the price charged for the products. The case stated how Virgin designed the distribution outlet in order for it to be appealing to its target market: “True to the emerging Virgin style, the shop’s décor was a mix of the outrageous and the shabby, attracting customers more bent on enjoying an experience than spending money.” It should be noted that Virgin has been keen on targeting the baby boomers which are into the “youth culture” after the war. Based on the case, the company continued to target the patrons of its Student magazine. No other promotional efforts are accounted for so the company might likely rely on word of mouth marketing. Virgin’s foremost goal during that time is bringing low-priced records to customers. With these other components of the marketing mix, it can be seen that the move from mail to retail is strategic for Virgin. The atmospherics employed are perfectly geared to target its prospective customers and was complementary to the other factors. This paper recognizes the fact that the move from mail to retail incurred new cost from Virgin. Instead of incurring postage costs, the firm is now paying rent to its retail establishment. However, the new establishment also offers opportunities for customers to look and listen to all the record available. The result is a new and convenient way of shopping for customers in a shop which are specifically designed for them. 4.0 From Non-Mainstream to Popular Music Virgin joined the number of small record labels in the UK market when it launched the album of Mike Oldfield entitled Tubular Bells. It can be recalled that this move generated a significant amount of revenue and profit for the company. Fearing that the company becomes a one-hit record label, it diverted from its traditional focus of popularizing albums by non-mainstream artists. The company recognized opportunities in marketing records of popular music. Thus, the company introduced Sex Pistols in the market. This is followed by the music of Phil Collins, Human League, and Simple Minds. It should be noted that in contrast with the first artist Mike Oldfield, these artists are release popular music which are preferred by the customers. This strategic change can be examined using the product life cycle model. The Product Life Cycle (PLC) as a portfolio analysis tool highlights four stages in a product’s life cycle—introduction, growth, maturity and decline (de Wit & Morgan 2004). This technique stresses that products life is limited and each stage in the life cycle offers different levels of potential gains. It can be seen that non-mainstream music can be considered as a fad which eventually dies out after the introduction of Mike Oldfield. Thus, selling music of popular artists which are still in the growth stage has taken the limelight. It should be noted that as with other market changes, the shift was primarily triggered by the taste of the majority. Virgin just tried to take advantage of the profitability of the growing demand for popular music by preferring artists which offers mainstream music. 5.0 From Music to Airline Perhaps one of the most notable turnaround which transpired at Virgin was the historical diversification of the once music company to an airline. The case clearly described the reaction of the various significant participants in the industry: “To the astonishment of the music industry observers, the horror of Simon Draper, and the ridicule of the music press, Richard Branson was off on a new path: he was going to find an airline.” This decision by Virgin’s president was really out of the box. It should be noted that “conventional business practice dictates that success should be consolidated and expansion restricted to complementary activities.” It seems illogical quite illogical to venture into other business lines knowing that Virgin was doing well in the music industry. Besides, Branson was aware that the he has no prior experience in the airline industry, the business capital was intensive, and the revenue is highly seasonal. However, we can see that the primary motivation that urged Branson to venture into the airline industry is the great idea given by Randolph Fields. It can be deduced that Virgin’s president realized the profitability of competing head-on with large airlines by offering new features coupled with excellent prices at the same or even lower price. The venture to the airline industry gave way to opportunities and challenges to Virgin. In contrast to the open and unregulated market in the music industry, the airline business was highly political as it is controlled by the state. Virgin also needs to cope with the pressure of raising funds for the capital intensive business. The company even decided to issue stocks as well as sell its music division altogether in order to raise the fund needed by the airline business. The decision of Virgin to venture into the airline industry can be understood by using the Ansoff Matrix. This tool in strategic management is utilized in order to aid management in deciding the product and market growth strategy. Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets. Market penetration is a company’s strategy which aims to serve current market with its existing products. Market development is offering new markets with existing products. Product development is offering new products to current market while diversification is offering new products to new markets (de Wit & Morgan 2004). It is apparent that the introduction of Virgin Atlantic is a diversification strategy because the company tried to capture new customers with their new product offerings. As discussed above, airline is very much different and unrelated to music. From entertaining customers, the company is now transporting travelers to their destinations. It should be noted that these two products are geared to capture different target markets. This report also wants to analyse Virgin’s move of financing its airline with the “jewel on the crown of the Virgin crown.” It should be noted that at that point, Virgin’s record label is largest remaining independent record label in the world and is generating high levels of revenue and profit to the Virgin Group. On the other hand, Virgin Atlantic has “advanced dramatically from the position originally envisaged” and was competing with large airlines as customers recognized its commitment for innovation and service. However, this business venture is suffering financially as a result of recession and Gulf War. The complete shift from music to airline is evidenced by the company’s divestiture of its record label to finance its growing but financially handicapped airline. This decision is a good example of the operation of the Boston Consulting Growth Share (BCG) Matrix. The BCG Matrix is a grid which relates market growth rate and relative market share. The two main goals of this auditing tool is to analyse its current business portfolio and decide which businesses should receive more or less investment, and develop growth strategies for adding new products and businesses to the portfolio at the same time deciding when products and businesses should no longer be retained. Four types of SBUs are distinguished—star, cash cows, dogs, and question marks (de Wit & Morgan 2004). In the case of Virgin, it becomes apparent that the company’s record label is a cash cow which generates substantial amounts of cash for the group. It should be noted that during that point, the company’s Virgin Music is the largest independent record company in the world in the mature music industry. The BCG matrix advises companies to “milk their cows” in order to finance stars like Virgin Atlantic which are business segments in rapidly growing industries that requires huge cash outlay. However, this report wants to point that more than just milking Virgin Music, the company sold the cash cow to Bertelsmann and Thor EMI at a premium. The firm banked at the excellent performance of Virgin Music in order to get secure a high asking price. With this way, the company’s then star Virgin Atlantic geared to become another cash cow in the group’s business portfolio. This paper argues that the move made by Virgin, though seemingly vague and illogical, is a good manifestation of the entrepreneurial spirit that a businessman must posses. Started by the great idea created by Randolph Fields and backed by Branson’s commitment of providing excellent service and innovation, Virgin has ventured into the airline industry. It can be seen that Virgin was able to seize a good opportunity. This paper argues that the success of a business venture is directly related to its ability and capability of extending customer value. Even seemingly illogical, the move was justified with the thrust of providing value to the clients which are not presently given by other players. It can seen that Virgin Atlantic have two core competitive advantages which were not given by other airlines—innovation and excellent customer service. With these two fundamental competencies, Virgin instituted a hybrid strategy of competing through price and quality. The company differentiated itself from competitors by offering a better product and also pricing it competitively. 6.0 Change in Modus Operandi It should be noted that until 1999, the operations of the businesses in the portfolio of Virgin are highly decentralized. The case study gives proof to this: Each operating unit was expected to stand alone, having little interaction with either the head office or other units.” It was also added that the company do not have a definite and single human resource policy instead of the mutually agreed upon fair treatment to every employee. The technology in the entire company was not integrated, so are the other functions. The business segments operate according to their own terms and directions. This move for a more centralized business structure began with Branson’s meeting with his managers in Mallorca. This effort as highlighted in the case study was not due to any rationalization envisioned by Virgin’s president. It was stated that Branson was only testing the possibility of the remark of his competitor. However, the underlying assumption that integrating its business segments will make Virgin unstoppable becomes a major motivation for Branson. After the meeting at Mallorca, Virgin came up with the plan of evolving into an e-commerce business entity which will offer diverse services to clients which include travel, financial services, publishing, music, and entertainment. The company decided to exploit advance technology to deliver value expected by the customer. Virgin also established the idea of developing a mobile device which can be used to purchase any product offered by the company. With the commercialization of the internet, Virgin took a step further by creating an online presence through Virgin.com. The company also offered from internet service through its Virgin Net. The evolution of Virgin Groups into an e-commerce business can be seen as the company’s response in the different factors in its environment. In the Mallorca meeting, it becomes apparent that Branson and the managers have conducted a thorough analysis of the business environment. A PESTLE analysis which included looking at the driver of change in business entities must have been a focus of the discussion. It can be seen that what surfaced is the huge role of technological advancement in changing the business landscape. It is irrefutable that the rapid advancement in technology has shaped how companies do business and compete. The most notable technology which presented both challenges and opportunities to business entities is the internet. The creation of a system which virtually links everyone in the world has huge implication to companies like Virgin. Internet technology facilitated the proliferation of dotcoms to complement their brick and mortar business strategies. Virgin’s evolution into an e-commerce business entity is a manifestation of how internet changes business models and structures. We can see that through the use of advanced technology, Virgin has completely changed its corporate strategy. The creation of a common charter for all the departments and business segments of the company implies collaboration among these groups. The charter clearly states the “role of the center vis-à-vis the subsidiaries.” In so doing, the company did not change its vision but merely modified its mission and strategy. The company remained in its goal but the ways in which to achieve these were changed. Virgin altered its organizational structure and operation as it integrates the previously individual tasks of purchasing, human resource, and information technology. 7.0. Conclusion Changes in organizations are often due to the demands of the business environment. It is irrefutable that these changes often create new opportunities and post new challenges for industry players. In the case of Virgin, the changes are often not justified by theories taught in the school. This gap between theory and practice is bridged by the company’s success. This report argues that the success or mere survival of business entity is based on how it copes and institutes strategic changes. Companies should be able to tailor the right strategies according to their strengths and competencies in order to take advantage of opportunities and combat prospective threats. References De Wit, B. & Meyer R. 2004. “Strategy: Process, Content, and Context.” International Edition: Thomson Read More