VIRGIN GROUP

Resource: Exploring Corporate Strategy

Introduction

The Virgin Group is one of the UK's largest private companies, with an annual turnover estimated at

£3bn per annum by 2000. Virgin's highest-profile business was Virgin Atlantic, which had developed to

be a major force in the international airline business. However, the group spanned over 200 businesses

from financial services through to railways; from entertainment mega stores and soft drinks to

cosmetics and condoms. (Figure 1 shows the breadth of the group's activities.) Its name was instantly

recognizable. Research showed that the Virgin name was associated with words such as 'fun',

'innovative', 'daring' and 'successful'. The personal image and personality of the founder, Richard

Branson, were high profile; in British advertisements for Apple Computers, together with Einstein and

Gandhi, he was featured as a 'shaper of the 20th century'.

Origins and ownership

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 £250 million. However, Branson became tired of the public listing obligations.

Compliance with the rules governing public limited companies and reporting to shareholders were

expensive and time-consuming, and 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, which valued the company at

£240 million. Virgin had grown fast, becoming profitable and entering and claiming a significant share

of new markets without the traditional trappings of the typical multinational. There was little sense

of management hierarchy and there seemed to be a minimum of corporate bureaucracy. There was no

'group' as such; financial results were not consolidated either for external examination or, so Virgin

claimed, for internal use. Its financial operations were managed from Geneva.

Each business or group of businesses ran its own affairs but they were tied together through a degree

of shared ownership and shared values. Some argued that Virgin's ownership structure enabled it to

take long-term views, free from investors' fixation with short-term returns. Indeed, Branson argued

that, as he expanded, he would rather sacrifice short-term profits for long-term growth and the

capital value of the various businesses. Others argued that financing purely through equity slowed the

group's ability to expand. Still others suggested that the complex web of businesses, with ownership

in offshore trusts in the Channel Islands and the British Virgin Islands, did little to support Branson's

image of honesty and openness.

Corporate structure

The structure of Virgin Group was so opaque that the true financial position of Virgin Group was

unclear. Due to its status as a private company, the complex group structure, and unavailability of

consolidated accounts, it was difficult to arrive at accurate figures for the Group's collective turnover

and profit. Companies within the group did not even share a common accounting year-end.

The Group has been described as a 'keiretsu' organization - a structure of loosely linked autonomous

units run by self-managed teams that use a family brand name. Branson's philosophy was that if a

business got to a certain size, he would spin off a new business from the existing one. Branson has

argued that, as Virgin almost wholly comprised private companies, the running of the Group must be

fundamentally different from that of a public limited company, which must keep shareholders,

stakeholders and analysts happy, and must pay attention to short-term goals of high taxable profits and

healthy dividends. The advantage of a private conglomerate was that the owners can ignore short-term

objectives and concentrate on long-term profits, reinvesting for this purpose.

Historically, the Virgin Group had been controlled mainly by Branson and his trusted lieutenants, many

of whom had stayed with him for more than twenty years. The approach to management was one that

decentralized decision making, with an emphasis on autonomous business-level decision making and

responsibility for their own development.

In 2000 the head office consisted of about 30 people. Senior staff had often had successful careers in

large, multinational corporations. With businesses scattered across a wide range of industries and

markets, the approach was hands-off, and until he was needed to finalize big deals or to settle strategy,

Branson ruled with a loose rein by delegating to managers and giving them leeway to use their initiative.

However, when it came to marketing and promotion, Branson would take a more involved role. And

when it came to the financing of the group and its deals, Branson's operating style was expressed in

his autobiography: 'In the early 1970s I spent my time juggling different banks and suppliers and

creditors in order to play one off against the other and stay solvent. I am now juggling bigger deals

instead of the banks. It is only a matter of scale.'

Corporate rational

Whilst the diversity of Virgin's business interests has been questioned, Branson has insisted that their

core values and approach have remained the same. The name Virgin was chosen to represent the idea

of the company being a virgin in every business they enter. However, before entering a new market, it

was thoroughly researched to decide whether Virgin could offer something truly different: the aim

being to extend the brand name at a low cost into selected areas where its reputation could be used to

shake up a relatively static market. Virgin would only put its name to a project if it met four out of five

criteria: it must be innovative, challenge authority, offer value for money by being better than the

competitors, be good quality, and the market must be growing.

Branson's method of adding value to businesses revolved around four main elements. The Virgin

brand was the single most important asset of the company. Based on a set of attributes and values

rather than a market sector, it was about being the consumer's champion. But this was underpinned by

their public relations and marketing skills; Virgin's understanding of the opportunities presented by

'institutionalized' markets; and their experience with greenfield start-ups. Virgin saw an

'institutionalized' market as one dominated by few competitors, not giving good value to customers

because they had become either inefficient or preoccupied with each other; and Virgin did well when

it identified complacency in the marketplace and offered more for less. Virgin had taken on one

established industry after another, from British Airways to Coca-Cola and railways, in an effort to shake

up 'fat and complacent business sectors'.

The Virgin brand made it possible to overcome barriers to entry in various industries and sectors.

Branson and his business development team reviewed about 50 business proposals a week, with

about four new projects under discussion at any one time. Good prospects would be those that

addressed institutionalized markets, fitted the Virgin brand, could respond to the Virgin method of

treatment, offered an enticing reward-to-risk ratio, and could be represented by a capable

management team.

Some have described the Virgin Group as a branded venture capital house, with the use of partners

providing flexibility and limiting risk. Each business was 'ring-fenced', so that lenders to one company

had no rights over the assets of another, even if that company -went bankrupt. Virgin's expansion into

new markets had been through a series of joint ventures whereby Virgin provided the brand and its

partner provided the majority of capital. For example, Virgin's stake in Virgin Direct required an

initial outlay of only £15m, whilst its partner, AMP, ploughed £450m into the joint venture. Virgin

Group's move into clothing and cosmetics required an initial outlay of only £1,000, whilst its equal

partner, Victory Corporation, invested £20m. With Virgin Mobile, Virgin built a business in the wireless

industry by forming partnerships with existing operators to sell mobile services under the Virgin brand

name. The carriers' competences lay in network management, not branding. Virgin set out to

differentiate itself by offering innovative services such as no line rentals, no monthly fees and cheaper

prepaid offerings. Although it did not operate its own network, Virgin won an award for the best

wireless operator in the UK.

Management style

Branson has sought out people with innovative ideas who are willing to start new businesses, want to

be the best at whatever they do, and with a strong desire to beat the competition. Organizational

participants must share certain values specific to the Group and everyone was expected to be familiar

with the corporate culture. Within the business units, Branson adopted his own personal style of

management, priding himself on actively involving employees and seeking their ideas on ways of

further adding value to his customers. Employees were expected to internalize values and behave

accordingly. This internalization of corporate values meant a greatly reduced need for external controls,

but employees were still held accountable for their performance. Human resource management

systems were in place to keep people committed by stock options, bonuses and profit sharing, and

wherever possible, there was promotion from within.

Challenges for Future

By 2001 commentators had a number of concerns. Virgin appeared to be highly dependent on the

profits of Virgin Atlantic; this was troubling as the airline industry was cyclical and facing increased

competition as a result of deregulation. There were also few other businesses making substantial profits

and many seemed to be operating at a loss. For example, both Virgin Express and Virgin Sun had

reported continuous losses since their inception. In 1999, Virgin Direct Banking reported losses of

£20.4m. Virgin Cinema, Virgin Cola and Virgin Clothing all made losses. Virgin Vodka, launched in

1994, was to be found in just a few duty-free shops and on Virgin Atlantic flights. In 2000, Branson

finally folded his UK clothing line, Virgin Clothing.

Selling chunks of some businesses to fund new and existing businesses had become a familiar story at

Virgin - they sold off their UK and Irish cinema houses, sold Virgin Music, sold a 49 per cent stake in

Virgin Atlantic to Singapore Airlines, and in 2001 were seeking buyers for Virgin Sun and Virgin

Express.

The most public problem -was Virgin Rail, whose Cross Country and West Coast lines were ranked 23rd

and 24th out of 25 train operating franchises according to the Strategic Rail Authority's Review in 2000.

It was cited as one of the most unpopular and inefficient train operators in Britain, with complaints that

the service was worse than it had been prior to privatization. It was estimated that Virgin needed to

double the number of passengers to be a success and spend £750 million on new rolling stock and

service improvements. There were other costs too. Government subsidies would decline up to 2002

from around £77 million in 1998 and it •would be necessary for Virgin to be paying the UK

government annual franchise fees rising from £3.9 million to £220 million in 2012. The loss of rail

passengers in 2001, following rail disasters and the consequent national disruption to rail traffic as a

result of emergency upgrading of track, did nothing to help this situation.

Another concern was whether Virgin had become purely an endorsement brand, rather than one that

could offer real expertise to the businesses with whom it was associated. Because Branson was so

closely linked to the Virgin brand, there was also a risk he could undermine Virgin's value if some of his

high-publicity ventures failed spectacularly. Critics also argued that Branson's foray into so many

diverse products and services could dilute the strength of the brand, and the Virgin brand, arguably

its most precious asset, could become associated with major problems, even failure. At the end of

2000, Branson was struck a blow when his People's Lottery consortium failed in their bid to run the

UK National Lottery and Virgin Rail failed to win the East Coast main line franchise.

Fig1: Virgin Group

The Virgin Group

Virgin Travel Virgin Rail Virgin Cinemas Virgin Media Virgin Hotels Virgin Group Virgin Music Virgin Trading

Virgin Atlantic Virgin Holidays Virgin Aviation

Virgin Balloon

Virgin Rail

Virgin Cinemas Virgin Publishing

Virgin Hotels Virgin Hotels Mktg

Virgin Direct Virgin Net Virgin Money Virgin Mobile Telecoms

Virgin Records Virgin Radio EMI Virgin Music Virgin Digital Studious

Virgin Megastores Virgin Enterprises Virgin Clubs Virgin Cosmetics