A finger in every pie-Analysis of Virgin Groupís Diversification strategies
by: Socrates - Consulting & Strategy Club at IIFT
ďBusiness opportunities are like buses, there’s always another one comingĒ – Richard Branson
Virgin Group is a diversified group of more than 200 privately held companies. The largest of these are Virgin Atlantic Airways, the number two airline in the United Kingdom; Virgin Holidays, a vacation tour operator;† the Virgin Retail Group, which operates numerous Virgin Megastores, a retail concept featuring videos, music CDs, and computer games; and Virgin Direct, which offers financial services. Other Virgin businesses include beverage maker Virgin Cola, a record label, book and music publishing operations, hotels, an Internet service provider, movie theaters, a radio station, cosmetics and bridal retailing concepts, and a line of clothing. Holding this disparate group of companies together is the combination of Richard Branson and the Virgin brand name. British entrepreneur Branson dropped out of boarding school at the age of 17, in 1967, to start his own magazine. That venture called ĎStudentí was an immediate success, establishing the foundation for what would become a multibillion-dollar conglomerate.
The early magazine venture displayed many of Bransonís typical characteristics, which were evident in his future business decisions. The magazine was aimed to appeal to the optimism, irreverence and fashion consciousness of the new generation. It was aimed at filling ďa gaping hole in the marketĒ and was aimed to be the voice of the new generation. The magazineís instant success was a testament to Bransonís ability to understand the market needs better as compared to his rivals and to do something different from the competition. The energy and enthusiasm that characterized some of his later ventures were evident from the fact that he was the editor, publisher and sole advertising manager of his magazine.
The success at ĎStudentí was followed by the formation of a mail order company, the first to use the brand name ĎVirgin Recordsí. The name was representative of the groupís commercial innocence, at the same time had some novelty and shock value. The company was formed after a new law had been passed allowing people to sell record at lower prices and Branson was among the first to take advantage of it. Although the business faced a lot of difficulties, especially during the postal crisis, Branson ingenuity kept it running at the same time the group was also expanding into new areas like opening a small record store, which was to be the beginning of Virgin Records.
Guided by the huge risk appetite and tremendous business acumen of its founder, Virgin group went on expanding into new and diverse segments, at the same time growing in size. A non exhaustive timeline of the groupís expansion is given below:
1968: Richard Branson produces the first issue of Student magazine.
1970: Branson forms a firm called Virgin, which begins as a mail-order record company.
1973: Branson forms record label Virgin Records.
1977: Virgin Records signs the Sex Pistols to a recording contract.
1984: Virgin Atlantic Airways is founded; first hotel interest is acquired.
1985: Virgin Holidays, a tour operator, is formed; Virgin Group is created.
1986: Virgin Group PLC is taken public through a $56 million stock offering.
1988: Virgin Group is taken private again through a management buyout; first Virgin Megastore is opened in Sydney, Australia.
1991: Virgin Publishing is formed; Virgin Group generates estimated sales of more than $2 billion.
1992: Virgin Records is sold to Thorn EMI plc for £510 million (US$957 million).
1993: Virgin Radio, the first national commercial rock station in the United Kingdom, is launched; Virgin Atlantic wins libel settlement of £610,000 from British Airways relating to ‘dirty tricks’ campaign.
1994: Company enters the soda market with the formation of Virgin Cola Company Ltd.
1995: Virgin Direct is created, representing the group’s entrance into financial services.
1996: Euro Belgian Airlines, a low-cost, short-haul airline, is acquired and renamed Virgin Express.
1997: Virgin Rail Group is formed, following the acquisition of two aging, poorly maintained rail lines.
Over the years the group has expanded into domains so diverse and disparate that sometimes the management style appears almost eclectic. Though Virgin Atlantic continues to be the groupís powerhouse as far as revenues and profits are considered, they have also done well in other segments like entertainment (Virgin Music) and telecommunication (Virgin Mobiles). Branson insists that in all the businesses they enter their core values and approach remain the same. Before entering any new market it is thoroughly researched whether the company could offer something truly different to the customers. At the heart of the diversification strategy is the aim to develop the five pillars of Business Empire: travel, leisure, mobile phones, entertainment retailing and personal finance. The diagram below represents the diverse businesses into which the company has spread:
Although the group has seen some huge success, it has had its share of failures too. Its ventures like Virgin Cola, Virgin Clothing, Virgin Movies and Virgin Vodka all made losses , raising serious questions about it management style. Most of its new ventures are guided solely by its founderís risk taking appetite and flamboyance. Also in recent years some of its most successful ventures like Virgin Atlantic and Virgin Rails have also had their share of failures.
Virginís diversification strategy at best appears to be chaotic and unrelated as compared to the strategy followed by most of the other firms. Moving into disparate segments though sometimes has worked for the company; it has also led to serious losses at other times. If we analyze the move into the cola market to challenge behemoths like Pepsi and Coke, they seem to be the result of a rebellious attitude of its founder rather than of some serious thinking on part of the management.
The basic principle during diversification is that there should be some synergy between the present business and the new business, which could be leveraged by the company or there is a market segment that is still not fully tapped or the company has something innovative to offer which would challenge the existing market players. A close analysis would reveal that apart from a few cases ,most of the time virgin has failed, it has tried to enter mature markets in the west , with leading players having a strong hold on the market† and without anything new to offer. It becomes evident that though the group claims otherwise, some of the diversification moves have not been though through and that there is a greater emphasis on the doing part rather than on the strategizing part and its losses amounting to GBP 132 million in 2010, corroborate the same . A great example of the same is the groupís foray into the Indian telecom sector. The telecom sector is one of the fastest growing sectors in the economy, however it has come a long from its days just after liberalization. There has been a considerable technological development as far as the market is considered. Here the company has failed to do its ground work leading to its failure as compared to other new groups like Aircel which identified opportunities and concentrated on the rural and semi urban users more.
The rapid diversification has also put a great strain on the financial resources of the group, as a result of which the company has been increasingly looking to outside equity financing. In recent times the group has sold some of its stake in group companies in order to meet its financing needs. The company is now using the franchising model wherein it enters a business as the minor partner, but allows it use its name and logo, thereby trying to cash in on the company brand.
The rapid diversification has led to brand dilution and its brand becoming more an endorsement brand driven by the flamboyance of its owner. The group should learn its lessons about carefully analyzing the market. The consumer has become attuned to the corporate marketing strategy, therefore any new product launch should first ask the question whether it is bringing in something truly different as compared to competitors. Virgin as a parent company should try to add real value to its businesses by investing in and developing real expertise. The company should focus more on expanding into businesses in which it is doing well like airlines, music, telecommunication rather than moving into randomly selected businesses. The group should also consider divesting its stake in certain businesses which are not doing well for sometime as it would provide the much needed finance for consolidation in other businesses.