Synergies between the Separate Virgin Companies - Essay Example

Strategic Management 1. Are there any synergies between the separate Virgin companies? Synergy is so important for businesses for it can offer effectiveness to the firms. In businesses, synergy is the advantage resulted from the performance of two or more business units or elements. Normally, the performance is higher than the sum of each business units. Synergy occurs when people together create new alternatives and solutions that are better than their individual efforts. The greater chance for achieving synergy is when people don’t see things in the same way. (Hellriegel & Slocum, 2009) A group of companies that can successfully construct core competencies via its value chain functions to promote competitive advantages and then those capabilities may lead to synergies of that corporation. Virgin is a motley collection of over 200 separate companies within main business lines- travel, lifestyle, media & mobile, music and money. The whole virgin group covers the businesses ranged from airlines to bridal stores. There are only two things common to the diverse range of whole Virgin enterprises: Richard Branson as the founder and CEO of the group, all business units are under the brand name, Virgo. There is no parent company for the whole group and Mr. Branson once said each of the small companies are separate and has to stand on its own. Virgin group pursues Japanese keiretsu in addition to brand franchising strategy. Virgin member companies used to share a similar identity but possess their own independent operations. Virgin pursues an unrelated diversification strategy with many product lines. Most companies diversify their business for the survival of their company, the extension of distinctive competencies to new businesses or in search of new competencies. Whenever Virgin diversifies its businesses, it is attached with the purpose of to make things better for the customers in the intended new industry. Diversification is known as the riskiest of the four strategies of the Growth  Matrix: Market penetration, Product development, Market development, Diversification. It is said because diversification strategy needs to find many new competencies for a corporation such as new techniques, skills, etc. Thus, only a corporation that possesses some synergies to adapt well in the inexperienced field. After doing thorough research and appraisals for the next line of business concerning industry analysis and customer point of views, Virgin used to enter into that industry to create its brand name and excellent customer values and services. Virgin declares on its website that it always tries to fill the gap in the industry with its synergic capabilities after reviewing its competitive advantages and opportunities for creating value for customers as well as the prospects for interacting with its other businesses. Innovation is given birth through Virgin’s encouragement to express employees’ ideas and the thinking out-of-the-box styles of Branson. It can be clearly seen at Virgin Atlantic which pioneered the innovative customer service consisting of in-flight messages, hair stylists, and aroma therapists, etc. This innovativeness in customer services can also apply in other business units containing relationships with customers. Consumers may anticipate new experiences using Virgin group services. On the Virgin website, it states that their belief upon making a difference and the position of Virgin as a company attentive for innovation, money, quality, fun and an impression of competitive challenge. As a conglomerate applying unrelated diversification strategy, Virgin group build synergies through interactions among its various individual business units. The recognized brand name, Virgin, also helps a lot to enter new industries and integrates itself with high reputation of good customer value among new consumers. It’s more likely for a customer of Virgin Atlantic to buy tour packages from Virgin Holidays. The untraditional and so little formal organizational structure of Virgo also contributes a lot in effectively entering into new markets by dividing existing employee groups and their expertise to go well with ventures. This strategy is emphasized even when Virgin provides its website, Virgin.com, a single portal for the whole group of Virgin businesses. Different Virgin businesses can achieve advantages from other member businesses in terms of exposures by a wide variety of customers unrelated to their own businesses. Despite their unrelated nature of business types, all business units represent the same brand name and pursue the same corporate strategy. These strategies allow Virgin group of companies to move in a synergistic manner. “The broader set of opportunities available in the diversified corporation as a result of internal transfer may also result in attracting a higher caliber of employee. “(Grant, 2008, p.377) The major role of Virgin represented is a consumer champion and so the roles of employees are essential in carrying out that purpose. Branson works out to have employees with entrepreneurial spirits by encouraging them to develop proposals for new business. For example, once a Virgin Atlantic employee advised for a bridal wear service and today Virgin Bride was established. Applying his vision of people-oriented capitalism, Branson intends to make profits come out from each of the company rather than to adjust the profit of one division to the loss of another. Virgin can relish information advantage of diversified corporation. It’s more effective in re-assigning of labor as well as capital among its divisions. It can also apply employees from one business unit and divisions to the newly implemented units together with detail information about employees and their capabilities and expertise. Grant states that these information advantages may be even greater in the case of labor. Diversified firms have benefits of less cost and higher availability of employee information. (Grant, 2008) Moreover, as a diversified firm, Virgin can exploit its different management skills derived from its group enhancement and exposing with new situations. Virgin successfully exploited its decentralized organization structure. “Efficiencies also arise from the ability of diversified companies to transfer employees- especially managers and technical specialists- between their divisions and rely less on hiring and firing.” (Grant, 2008, p.377) There are many benefits of being under a unique brand name. Meanwhile the separate segments of Virgin conglomerate benefit from global markets, the reputation of the brand name Virgin is flourished. Having strong and good brand recognition is very useful for its marketing team. This advantage cannot be achieved if Virgin pursues different strategies, i.e. subsidiary brands, rather than a brand franchising operation and keiretsu. The unity and common identity under same brand name Virgin is one of the important synergies of Virgin. The decentralization of the organizational structure and little hierarchical management systems boosts to establish an environment in which employees can have a chance to display their best abilities and to promote themselves to higher levels. And that lack of formalness in organizational structure provides Virgin with a working environment with closer relationships. The limited layers in company hierarchy propose rapid responses and quick communication. Virgin can thrive on its small but entrepreneurial businesses shared common identity and independent structures which drive Virgin away from bureaucratic costs and brand conflicts. Virgin group has been successful in a majority of its ventures but it  confronted several failures too. Although diversification and brand recognition strategies help Virgin a lot to enter into new businesses easily, it’s notable that too many diversified businesses may weaken Virgin brand name. It’s also important to maintain a proper communication and cooperation among business units to keep synergies. 2. Which businesses, if any should Branson divest? Why? Grant (2008) stated “if the future seemed bleak, the best strategy might be to divest the business in the early stages of decline before a consensus has developed as to the inevitability of decline. Once industry decline is well established, finding buyers may be extremely difficult.” (Grant, 2008, p.310) A business should be divested if it is in a declining industry or it has no competitive advantage over its competitors. Although Virgin has been successful in expanding business sectors and some business units such as Virgin Mobile and Virgin Atlantic, there are a number of businesses that need to be divested. In addition, Virgin may achieve opportunities to raise cash for investments in future business or current flourishing business by divesting some of its business units with more tightened focus on the rest of the businesses as well as its goals. For example, if Virgin business unit that operates a telecom service which will be divested and other analysts have also urged Virgin to divest its mobile holdings whether it is a successful network or not. According to The Economist, only Virgin Travel made a large profit and the rest faced losses. Financial Times asserted that Virgin’s wireless telecommunication businesses and Virgin‘s airline businesses also showed profit growth. Virgin divested Virgin Atlantic, Virgin Megastores, Virgin One, Virgin Blue, Virgin Mobile (UK) and Virgin Express, by selling full or some percentage of these business units. The head of brand identity at consultant Landor Associates pointed out that businesses such as beverages, consumers or financial services should be divested to make Virgin fitter. Extensive dissatisfaction of rail travelers, major concern of the company value, suggested that Virgin had better divest it. Virgin Rail, 49% owned by Stagecoach, was with a reputation of poor punctuality and negative profits. Also, the railroad industry in UK is run under an inadequate arrangement. Divesting is suitable choice for Virgin to be more focused on other sectors of the group. While choosing which businesses to be divested, Virgin can select a strategy depending on two aspects: unrelated diversification or brand recognition. From unrelated diversification perspective, meaning that Virgin will stand firmly stand as an unrelated diversified company, it should emphasize on non high return industries such as property or equipment industries for divesting. It is because unrelated diversification strategy works well with high return industries such as IT-related industries. On the other hand, if Virgin only intends to focus more on its brand recognition strategy, it should think of consolidation of current business units more firmly, under more related line of businesses. For example, it should try to provide more customer service innovations and values to build a stronger brand name for one aspect. Although Virgin Management Ltd which handles management of other Virgin companies showed several net losses, it should not be divested. It operates management of other companies and also owns Virgin Bride, Virgin Mobile, Vanson Group Ltd., and Virgin Life Care Investments Ltd. To maintain the synergies of a company which pursues an unrelated diversification strategy, Virgin requires Virgin Management to get its goals. Another business that needs divestment is Virgin Retail Group which is a holding company that owns Virgin Retail Ltd and Vspace Ltd running internet cafes. Virgin Money needs to be considered for divesting because Virgin strong corporate cultures with informal styles are contrary with customary financial operations. To be profitable as a financial firm, a company should have strong and long-established reputations for financial services and solid financial backgrounds. Virgin new ways of operating business may find difficulties in building trust, especially insurance businesses. Virgin’s cosmetics, bride and apparel businesses require improvements for innovations and quality. This group of business also makes distractions from Virgin main and successful businesses such as Virgin Mobile, Travel or Telecom. It is questionable to whether Virgin will focus evenly on all businesses to strengthen its philosophy of allowing businesses to access on their own or it will continue to focus only on the businesses that provide it financial gains. Again, it depends on the two choices available for Virgin to make decisions on which business units it’s going to divest. 3. What should Branson do to assure that Virgin survives him? The success of Virgin depends mainly upon its strategist and founder, Sir Richard Branson and his strategies to sustain a competitive advantage, an advantage over competitors. It also relies on how well Virgin proceed to utilize its synergies and how to build its informal but close corporate culture. Effective competitive positioning needs a fit between a corporation’s strategies and its business model. Branson had set the corporate strategy which led Virgin to stand as a large corporation today. The major strategies he pursued are unrelated diversification strategy under which many different business units have been established and initial brand recognition strategy or ‘Stick it to the big boys’ strategy which allows all business units to work together under one brand name, Virgin. There‘s no overall parent company and each of Virgin companies has the right to act on its own way applying a corporate strategy. As a democratic leader, Branson rejected many traditional aspects of formal business routines. His strategy can be said quite strong but he should not neglect outside criticisms which he regarded as misunderstandings of his business empire. (Grant, 2008) As a founder and instigator of a huge corporation, he should consider the fact prior strategic commitments and lcarus paradox may become the reason a company fails. These two facts are so common to most companies’ failures. A company may relish much on its past success stories and may ignore realities and this will bring harm for the organization. It’s a very appreciable fact that Branson wants to have a considerable number of employees as millionaires. He opened many opportunities for his employee to show their ability to the fullest and his decentralization strategy worked out to provide more authority for each employee. “To manage the organizational context includes influencing social and behavioral norms, but these depend on some shared cognition of what the organization is and an emotional attachment towards what the organizational represents.” (Grant, 2008, p.457) However, this decentralization strategy is not working well for financial matters. Although Virgin possesses considerable financial and managerial capabilities, its financial reporting is fragmented and hard to interpret to make clear financial reports. Moreover, there’s no consolidated account for the whole group. (Grant, 2008) The decentralization structure is good for promoting entrepreneurial spirit but difficult for financial aspects. Virgin should keep a centralized corporate financial system for it needs a lot of funds transferred among the group members. Identity is essential for an organization and so Branson should re-assess his business segments in order to avoid brand dilution because of too much diversification. Again, an organization should be simple enough to deal with sophisticated situations across different industries. Grant suggests that “in order to cope with a complex environment, an enterprise might have to resort to simple rules. A similar implication may be drawn in relation to internal organization. “(Grant, 2008, p.456) Branson is a born and charismatic leader who can carry out transformational leadership skills to Virgin’s success. But he ought to foresee for the right person who can hand over his legacy if he resigns his position as chief entrepreneur. (Grant, 2008) To stand Virgin in each industry successfully, Branson and his strategic groups should be cautious for not doing diversification for the wrong reasons. Branson also will have to consider some threats faced by Virgin. Some businesses such as Virgin Mobile holdings are in challenging industries concerning high technology. Such industries demands great efforts on research and development and so Virgin has to try hard to catch up with the advanced technologies and competitors. Moreover, most of Virgin businesses exist in low profitable industries, i.e., airline industry. Branson should carefully choose an industry which he will enter in future after realizing Return on investment and Return on assets. He may also change his attitude towards accounting profits. He used to prefer cash flow and capital value rather than accounting profits which were negative. Branson should take care of clear vision, missions, values, goals and objectives to shape Virgin clearer in future. He should unambiguously identify his organization and its stand. Whatever strategy and position he pursues, it’s important they are fitted with the business models of each unit. His business models for Virgin also should reflect how to compete across industries and countries. Grant stated that whichever path Virgin chased, it seemed to have organizational changes needed in order to manage intercompany linkages. (Grant, 2008) The corporate strategy should address the problems and describes ways to reduce bureaucratic costs among value-chain functions of diversified businesses. As a corporation pursuing unrelated diversification strategy, Virgin should operate as a portfolio of independent businesses. It should follow multidivisional structure, great use of ROI and budget controls to be matched well with its unrelated diversification strategy. References: Hill, C.W.L., & Jones, G.R. (2008) Strategic Management Theory. 8th edition Grant, R.M.(2008) Contemporary Strategy Analysis. 6th Edition. John Wiley and Sons Ltd Hellriegel, D., & Slocum, J.W. (2009). Organizational Behaviour, 12th edition, 2009, South Western Cengage Learning Porter, M.E. (1990). The competitive advantage of nations Read More