A STRATEGIC ANALYSIS OF THEVIRGIN GROUP

JamesBowyerBA(Hons)Business

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CONTENTS

ExecutiveSummary 2

Introduction 3

CorporateStrategy 3

BusinessStrategy 4

InternalAnalysis 4

Valuable 4

Rare 5

ImperfectlyImitable 5

NonSubstitutable 5

Advantage 6

ExternalAnalysis 6

ThreatofNewEntrants 6

PowerofBuyers 7

ThreatofSubstituteProducts 7

PowerofSuppliers 7

IntensityofRivalry 8

ComplimentaryProducts(6thForce) 8

CorporateSocialResponsibility(CSR) 8

Evaluation 9

Strengths 9

Weaknesses 9

Opportunities 10

Threats 10

Conclusion 10

Recommendations 10

References 12

Appendix 15

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EXECUTIVESUMMARY

This report gives an analysis, evaluation and recommendations for the corporatestrategyofVirginGroupand the internalandexternal strategyofVirginAtlantic.Theresearch found that theairline industry is incrediblydifficult tooperateprofitably in,due to powerful suppliers and intense rivalry between firms. It also found that theVirginbrandisapowerfultoolincreatingacompetitiveadvantage.TheevaluationwasthatVirginAtlanticarecompetingwellinsidesuchacompetitiveindustrybutcoulddomoretomaximisetheiropportunities.Recommendationswere:

• To exploit the expanding airline market, especially in quickly growingmarkets

• Tofocusonthefuture,inparticularbiofuelproductionwhich,giventherapidlyexpandingmarket,couldsoonbecomemorevaluablethancurrentfossilfuels

Thisreportalsohassomelimitations:

• The full range of factors influencing both external and internal analysisarelimitedduetowordcountconstraints

• TheVirginGroupisanincrediblycomplexmixofinvestmentsandroyaltypaymentsforthebrandnamesoforthepurposesoftheCorporateAnalysisthishasbeensimplified

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INTRODUCTION

VirginAtlanticwas founded in1984byRichardBransonwith theaimofproviding“ahighquality,valueformoneyairline”.(Virgin.com,nodate,a)SincethenVirginAtlantichasexpandeditsfleetto39aircraft,transported53millionpeoplearoundtheglobeandcurrently employs around 9000 people worldwide (Virgin.com, no date, b). In 200049%ofVirginAtlanticwasboughtbySingaporeAirlinesfor£600million(Neville,2012)thenin2014DeltaAirlinesboughtthe49%stakeoffSingaporeAirlinesfor£224million(Topham,2013).Howeverthe51%majoritystakeisstillownedbyVirgingroup.

This report will analyse the corporate strategy of Virgin Group and the businessstrategyofVirginAtlantic. Itwill then summarise the information gathered from thisanalysisandbecombinedtoformanevaluationofboththecorporateandbusinesslevelstrategies. Itwill then concludebydecidingwhether the strategyofVirginAtlantic iseffectiveandproviderecommendations.

CORPORATESTRATEGY

Corporate Strategy describes the medium to long term decisions made by anorganisationandultimately‘makesfundamentaldecisionsaboutthefuturedirectionofanorganisation’(Lynch&Smith,2005).

FIGURE1-VIRGINGROUPSTRUCTURE(GORDON,2014)

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Virgin Group is involved in around 400 operations (Wachman, 2012). The group hasbeen described as being ‘a structure of loosely linked, autonomous units run by self-managedteamsthatuseacommonname.’(Johnsonetal,2008)demonstratedbyfigure1.Asaresultofthis, theVirginGroupdoesnotrunallofthebusinesseswithinVirginGrouponadaytodaybasis. Insteaditdecideswhichnewbusinessesto invest inandwhichshouldbeterminatedandwheretheoverallstrategyofthebusinessisgoing.Thisis done by a group of directors and partners which, until recently, also included SirRichardBranson.AnexampleofmanagingthesebusinessunitsiswhentheysoldVirginRecords for£510million in1992 to finance the strugglingVirginAtlantic (Telegraph,2014). Therefore the Virgin Group itself is where strategy is formed, between thevariousdirectorsandnotjustfromRichardBranson(Gordon,2014).

Byallowingbusinessunitstobeautonomousitenablesthemtobeagileintheirmarketand unaffected by other areas of the organisation. An example of such is the recentVirginGalacticcrash(BBCNews,2014)havingnoeffectonVirginTrains,VirginAtlanticoranyotherVirginbusiness(Johnsonetal,2008).Thisisimportantinanorganisationas large as Virgin Group because if Virgin Atlantic for example needed to changesomethingquicklybuthad to goback all theway to SirRichardBranson theprocesscouldtakemonthsinsteadofdays.

ThisallindicatesthatVirgin’sbusinessesarerunasportfolios.PortfoliosaredefinedbyHedleyasdevelopingdifferentstrategicobjectives(Hedley,1977)clearlyallowingtheabovetotakeplace.Thisisopposedtoasynergystrategywhereallbusinessunitsaregroupedaroundacommoncorecompetence(DeWitandMeyer,2014),witheachoneimpactingtheother.

BUSINESSSTRATEGY

INTERNALANALYSIS

Toanalyse the internalbusiness strategyofVirginAtlanticBarney’sVRIN framework(Barney, 1991) will be used. The reasoning behind using VRIN is because a non-substitutable product is a large part of Virgin Atlantic’s competitive advantage,thereforeitcannotbe ignored.Similarly,VRINiswellsuitedtoaserviceproductsoismoreappropriateforVirginAtlantic.

VALUABLE

Customer service has been a valuable resource for Virgin Atlantic since they werefounded (Virgin, 2015, c). Whether it be being the first to put personal televisionscreens in every seat or the first to offer a premium economy service, Virgin havealwaysbeenat the forefront.This,asMintel researchshows, isa toppriority for longhaulcustomersmeaningVirginAtlanticcreateacompetitiveadvantageforthemselves(Mintel,2014).Furthermore,becausethey fly toasmallernumberofdestinationsbutonhightrafficroutes(Virgin,nodate,d),meanstheycanofferahighqualityexperience

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atalowerpriceforconsumersduetoguaranteedflightcapacity.Therefore,theyhaveapremiumserviceatacompetitiveprice.

RARE

VirginAtlantic’srarestresource is theircabincrew.Thecabincrewismorerarethanvaluable because the features such as comfy seats, premium economy and personaltelevision screens can be replicated by other firms. However, Virgin Atlantic’s cabincrewissomethingthatiscoretotheirsuccessoverothers.AsRichardBransonhimselfsays ‘Most airlines now have similar seats, food, planes and entertainment – ouradvantage is the people who are proud to work for us’ (Branson, 2014). This was astrategyfromtheinitialcreationofVirginAtlanticwheretheydecidedtoemploy95%of cabincrewstaffwithnoexperienceof flyingonotherairlines inorder toensureafreshanddifferentapproach(Branson,2014).

IMPERFECTLYIMITABLE

OnemajorresourcethatbelongstoVirginAtlanticistheVirginbrandnameitself.Givenits scale, history and unique leader, the Virgin brand image is virtually impossible tocopy.ProofoftheVirginbrandreputationcanbefoundinresearchshowingtheVirginbrand is associated with words such as ‘fun’, ‘innovative’, ‘daring’ and ‘successful’(Johnsonetal.,2008).ThisenablesVirginAtlantictoutilisetheemotionssynonymouswith the Virgin brand to create a service unique only to them.Whilst this feature ofVirginAtlanticwaspossiblymorerelevant in theearlyyearsof theairline,customersarestillinfluencedbyitbecauseofwhatBarneystatesare‘uniquehistoricalconditions’(Barney,1991,107).Bythis,Barneyimpliesthatbecauseabusinesscreateda ‘uniqueandvaluable’cultureduringtheearlystagesofitscreationitwillhavean‘imperfectlyinimitableadvantage’overotherfirms(Barney,1991,108)

NONSUBSTITUTABLE

As previously mentioned, being non-substitutable itself is a vital resource for VirginAtlantic. The only other realistic way of reaching the majority of destinations is viacommercial cruise ship which takes a minimum of seven days to cross the AtlanticOcean(Cunard,2015).Henceanairplaneistheonlypracticaloptionforthosewithanyreasonabletimeconstraints.

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ADVANTAGE

Using this information and the table above it is apparent that Virgin Atlantic has asustainable competitive advantage. In particular, the Virgin brand name offers asustainable advantage as it completes all the VRIN qualities. It is also virtuallyimpossibleforanyothercompanytocopythisexactlyandasnobodyhasyetdonesoitoffers further support to the brands sustainable advantage. However, Teece (1997)believesitisalsoimportanttoobserveexternalcompetitivecircumstancestogainafullunderstandingofafirm’scompetitiveadvantagewhichwillnowbeanalysed.

EXTERNALANALYSIS

Inorder toanalyse theexternalenvorinmentofVirginAtlantic,Porter’supdatedFiveForcesModel(2008)willbeusedalongwithBrandenburgerandNalebuff’s(1997)sixthforce.Thefiveforcesmodelisbeingusedbecauseitenablesustogainacomprehensiveimageofanindustry,helpingcompanieslookpasttheircompetitors(Porter,2008)andhelpunderstandwhetheranindustryisattractivetothosecompaniesinvolved.

THREATOFNEWENTRANTS

Porter(2008)statesthatthreatofnewentrantsishighintheairlineindustry.However,inpracticeitisnotsosimple.Onereasoniscapitalresources(Porter,2008).Tosustainan airline into become a significant competitor requires vast amounts of capital,demonstratedbyVirginGrouphavingtosellVirginRecordstopour£510million intoVirgin Atlantic (Telegraph, 2014). Closly linked to this is the significant disadvantagenew entrants have with access to distibution channels (Porter, 2008). Research byHarteveldt (2012)hasshownthat theaverageconsumerwillvisit22websitesbeforebooking a flight. Given that companies pay to be on comparison sites(moneysupermarket.com,2009)orsell throughtravelagents(Porter,2008) it ishardfornew companies to consistently establish themselves in the consumers conscience.Therefore, in the longtermit ishighlyunlikelyanewairlinewillbeable tochallenge

Valuable• CustomerService• Oneoftheworld’syoungestfleetof

aircraft• CabinCrew• Flying experience, high quality at

lowcost• VirginBrand

Rare• Heathrowslots• CabinCrew• VirginBrand

Imperfectlyimitable• VirginBrand• Unique historical conditions of

VirginAtlanticvsBritishAirways• CabinCrew

NonSubstitutable• Nootherpracticalwayofgettingto

manyofthedestinations• VirginBrand

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incumbentsintheindustry. Hence,barrierstoentryarehighandconsequentlythreatofnewentrantsislow-medium.

POWEROFBUYERS

Buyers(customers)holdavastamountofpowerwithintheairlineindustryduetotheprice war they have created between airlines (Porter, 2008). Porter suggests thatbuyersare fickleandhavevery littlebrand loyalty,almostalwayschoosinganairlineexclusively on price. Harteveldt (2012) suggests the modern air traveller is ‘brand-agnostic’and‘price-focused’,forcingairlinestolowertheirpricesasmuchasphysicallypossible. Porter (2008) andHarteveldt (2012) also suggest that there is little brandloyalty,meaning even an excellent service cannot guarantee repeat custom. Power ofbuyersisthereforehigh.

THREATOFSUBSTITUTEPRODUCTS

Substitute products are divided in the airline industry. Short-haul operators competewith substitutemethods of transport such as trains or cars (Trend, 2011). Long-hauloperatorshoweverarecompetitingagainsttechnologysuchasvideoconferencingandconference calls because of the large distances involved (Porter, 2008). Denstadli(2004)however,foundthatthesubstitutionrateforvideoconferencingoverairtravelwas2.5-3.5%sotheeffectisnotconsideredaseriousthreattoairlinesandwillalwaysbe supplementary to personal contact. These findings are also endorsed by Roy andFiliatrault(1998)whoestimatedconferencecallswouldonlyreachasubstitutionrateof 3.6%-8.6%.The threat of substitute products is therefore high if the company is ashorthaulopperatorbutlowifthecompanyflieslonghaul.

POWEROFSUPPLIERS

IntheairlineindustrythereareonlytwolargesuppliersofaircraftinBoeingandAirbus(Economist, 2014)withbothhavingdifferent strategies and therefore types of plane.TheAirbusA380aimstocarryasmanypassengersaspossiblelongdistanceswhereasBoeing’s 787 aims to travel shorter distances quickly (Topham, 2013). Consequently,airlinesaretechnicallylimitedtoonechoiceofaircraftdependingontheirownstrategy.Porter (2008) also states that suppliers of aircraft engines and airport gates are allincrediblypowerful,takingalargepercentageoftheprofits.Moreover,thereareonlyafewfuelsupplierstoairlines(Irelandetal.2008),againmeaningairlineshavelittlesayoverthepriceofavitalresourcetothem,fuelcostsaccountfor30%ofairlineexpenses(NPR,2015).Giventhesecircumstancessupplierpowerishighintheairlineindustry.

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INTENSITYOFRIVALRY

In the airline industry rivalry is almost exclusively based on price which can beespecially destructive to profitability (Porter, 2008). It is destructive because itencouragescustomerstoignoreadditionalproductfeaturesandfocusonprice(Porter,2008), potentially rendering any attempt at gaining a competitve advantage useless.Priceissoimportantthatsincethe1980’spricehasdecreascedby2.5%onaverageperannum(Papatheodorou,2006)Thereasonrivalryisbasedonpriceisbecausefirmsarealmost identicalandmarketgrowth isslow(Porter,2008),6%peryear in theairlineindustry (Papatheodorou, 2006). However, whilst intense rivalry has limitedprofitabilityintheairlineindustry,itcanalsobebeneficialtoperformance(McManners,2014). For example it candrive innovation, suchas firmspurchasing thenewBoeing787whichuses20%-30%lessfuelthansimilarsizedplanes(Boeing,2015).Thiscouldprove crucialwhen customers are choosing between rivals on cost. Therefore rivalryinsidetheairlineindustryisincrediblyintense.

COMPLIMENTARYPRODUCTS(6THFORCE)

Complentaryproducts,whisltnotpartofPorter’s five forces,arean importantpartoftheairline industry.Acomplentaryproduct isonewhichmeanscustomersvalueyourproduct when it is coupled with the one in question (Brandenburger and Nalebuff,1997).Themaincomplementaryproductinquestionistheairtrafficcontrolservice.Itisnotasupplier,asPorterbelievesitshouldbe,becauseintheoryanairlinecouldquiteeasily operate a flight to and from a destinationwithout the aid of air traffic controlwere therenootherplanes in the sky.Howeverdue to regulations theymustuse airtrafficcontrolbecausewithoutittheywouldn’tbeallowedtoflyandcustomerswouldrefuse to fly without it. Air traffic control is so important tomention because of theeffectitcanhaveonairlineswhenitisnotactive(Philipson&Haenan,2014).

CORPORATESOCIALRESPONSIBILITY(CSR)

As an industry, aviation is under a lot of pressure surrounding CSR, especially in theform of fuel emissions. According to ATAG (2015) the aviation industry makes uparound2%ofallhumaninducedcarbondioxide.HoweverClark(2010)arguesthatindeveloped countries it could bemore like 13%-15% due to the economic balance ofairline customers. Furthermore, Borken-Kleefeld et al. (2010) states that in the shorttermairlineshavethebiggesteffectontheenvironmentoveranyothertransportandgiven the expected rise in airline traffic over the next few years this is likely to bemagnified.Anotherissueforairlinesistheamountoffuelremaining.AstudybyNygrenet. al, (2009) concluded that despite the vast increase in airplane fuel efficiency inrecentyears,70%moresothanthe1960’s,theexpected5%perannumincreaseofairtrafficisnotrealisticgiventheamountoffuelremainingandalreadybeingoutputtedbyrefineries.Therefore,airlinesmustinvestinbiofuelstosimplyexistinthefuture,nevermindbecompetitive.

To try and combat these issues Virgin Atlantic have taken several steps to safeguardthemselves. Firstly, as shownon page 8, they have invested in a new fleet of aircraft

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designedtobe20%-30%morefuelefficientthantheircurrentones.Virginisalsoattheforefrontofthe industry intryingtofindaviablesolutiontofossil fuels. In2008theyflew from Heathrow to Amsterdam with one engine running on biofuels, the firstcommercialplaneevertodoso(Marsh,2008).TheyarealsoinvestinginandworkingheavilywithLanzaTech todevelop lowCO2andCO2 free fuels (Virgin.com,2013, e).Their commitment to this issue has been externally recognised with the SustainableBiofuelsAwardsandTheObserverEthicalAwards in2013.Therefore,VirginAtlanticcan be considered an environmentally conscious company however until they runaircraftonbiofuelstheeffectivenessoftheirschemesarelimited.

EVALUATION

STRENGTHS

Virgin Atlantic’s biggest strength is its cabin crew. As shown on page 5 this is whatseparatesVirginAtlantic from its competitors in themoderneraandhasbeena corepart of their thinking since the business’s conception. This strategy optimises theirstrengthsbecauseasshownonpage4thebusinessalsohasexcellentcustomerserviceandoneoftheworld’syoungestfleetsofaircraft,focusingtheirstrategyonapremiumserviceatacompetitiveprice.

WEAKNESSES

A concern andweakness for Virgin Atlantic is their current range of destinations. Asmentioned on page 5 they only fly to a small number of destinations so their targetcustomerisnaturallylimited.Howeverthefirmplaysdownthisweaknesswellbyflyinghightrafficroutesmeaningtheplanesareusuallyfull.

Strengths• Virginbrand• Newairplanes• CabinCrew• Heathrowslots

Opportunities• Expandingmarket• Nosubstitutesforlonghaultravel• Biofuelknowledge• Lowthreatofnewentrants

Weaknesses

• Only fly to a small number ofdestinations

• Reliant on ‘unique historicalconditions’

• ToodependentonVirginBrand

Threats• Risingfuelcosts• Fuelrunningout• Fiercecompetition• Alliancesofotherairlines• AirTrafficControl• Powerofsuppliers

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OPPORTUNITIES

VirginAtlantic’sbiggestopportunitiesareitsdominationofthemarketthroughalackofsubstitutes, the expanding airline market and the low threat of new entrants asmentionedonpages6and7 in the five forcesanalysis.However itwouldappearthatVirgin Atlantic does not exploit their opportunities particularly well. For example,whilst theyhaveboughtmanynewaircraft they are simply to replace theolderonesrather than exploiting the expanding market. A potential opportunity is workingtowards creating biofuels; however as they are working in tandem with othercompaniesitisunlikelyVirginAtlanticwillhaveexclusiveuseofthem.ThereforeVirginAtlanticcouldcapitaliseontheiropportunitiesbetter.

THREATS

VirginAtlanticfacemanythreatsasabusinesshoweveritreducesthesethreatswell.Asnoted on page 8 rising fuel costs and diminishing fuel supplies are dealt with byworkingtocreatebio fuels.Whilst fiercecompetitioncan’tbereduced,VirginAtlantichave limited the effects of it by creating a strategywhich keeps prices low and alsooffersthedesiredextraserviceonlonghaulflights.ThereforeVirginAtlantic’sstrategyworkswelltoreduceexternalthreats.

It is also important to note here that the business strategy matches the corporatestrategyasVirginAtlantichavebeenabletoadjustquicklytocompetitors,inparticulartheirpricesbecausetheyareautonomousintheirleadership.

CONCLUSION

As mentioned in the introduction it must now be decided whether Virgin Atlantic’sstrategy is effective. Virgin Atlantic is excellent atmanaging their internal strategies,turning weaknesses into strengths and using their strengths to change the industryaroundthemwithregardstocustomerservice.Howevertheairline industry isoneofthe least profitable in the world, in the most part due to external factors. With theexception of the threat of new entrants, all aspects of the Porters five forces areunfavourable in the airline industry making it incredibly hard for a business to beprofitable.ItmustbesaidthatVirginAtlanticdonotmaximisetheiropportunitiesverywellbutthethreatsalmostmakethisimpossible.Extremelypowerfulsuppliersoffuel,planes and airport gatesmean it is almost impossible to generate an advantage overothercompetitorsinthisway.ThereforetheeffectivenessofVirginAtlantic’sstrategyiscomplex.Itiseffectiveinmakingthebusinessasstrongaspossibleinternallyhoweverthe success of this strategy is greatly constrained by external factors in the industry,manyofwhichareoutofVirginAtlantic’scontrol.

RECOMMENDATIONS

GiventhatVirginAtlantichascreatedagoodinternalstrategyrecommendationsmustfocus around opportunities. One potential opportunity is to utilise the consistentlyexpandingairlinemarketandopennewflightstothemostrapidlyexpandingmarkets.

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ItisevidenthoweverwiththefailureofLittleRedthatVirginAtlanticshouldfocusonlong haul flights. Another recommendation is to expand into bio fuel researchindependently.Sincetheyalreadyhavesomegroundingintheareaitwouldbepossiblefor them to create their own fuel and become a supplier to airlines in the future,generatingthemselvesthepowersupplierscurrentlypossess.

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APPENDIX

Gordon, S. (2014) ‘Brand it like Branson.’ Financial Times. [Online] 5th November.[Accessedon21stJanuary2015]

Figure1-VirginGroupStructure(Gordon,2014)