At the beginning of 2007, there were more than two hundred companies registered in Britain under the name of Virgin brand owned by the Richard Branson. As per virgin website, only 36 of them were dealing with most of the company’s operations. (Grant, p807, 2010).Though there were negative speculations on the overall profit of the company as a whole it’s interesting to study how the company managed to do diversification in businesses run by each of them. From the case study, it is clear that Richard Branson considered cash flow and capital as the critical performance indicator of Virgin group instead of the accounting profits. There were obvious questions raised on the strategic direction of such diversely oriented firms owned by the virgin group (Grant, p807, 2010).
Firstly, this analysis tries to understand the link between so motley connected companies in terms of the resource and capabilities. The Virgin group owns the resources and capabilities in each of these companies even though there is no one single parent company registered to own all of them (Grant, p807, 2010).
The virgin group was listed in NASDAQ for a shorter time but Richard Branson managed to take over all the external shareholders thereby able to convert the company back to a private company (Grant, p809, 2010). All the virgin companies are financed on a stand-alone basis and are funded by internal cash flows and external financing. When running a group of private companies, seeking long-term capital growth is the best approach (Grant, p807, 2010). Richard Branson clearly identifies this as the strategy of the company and he is successful in achieving such results. This is an organizational capability that virgin group is having. As mentioned in the case study, Mr. Branson and team are able to fund one business from the profit of the other and this may not have been possible in the case of public company because of the regulations in place. Such resource and capabilities are the primary determinants of a firm’s strategy and performance (Grant, p122, 2010). Virgin brand extends from train travel and financial services to nightclubs and music downloads. Few brands encompass such a wide range of products. The brand Virgin is one of the greatest assets the company has and Richard Branson is able to launch new ventures under the same brand there by adding brand equity to the new one.
Based on the company annual reports (Grant, p821, 2010) Virgin rail group holdings generate a very minimum net profit when compared to the total revenue it generates. This would mean there is a high operating cost involved in running this firm. Forty-nine percentage of stake of this company belongs to Stagecoach. Richard Branson may need to consider further divest in Virgin rail to avoid future losses. When there are many companies making good profit and the others making loss a strategic approach to divest and invest needs to be carried out. Divestment provides capital to support new business ventures (Grant, p809, 2010). The large number of companies under Virgin elevates the risks involved and divestment strategy can help to avoid risks. However, this should not be by not giving a firm an opportunity for investment. The case study is not giving enough details to find out the rate of return of the companies to do selective divestment analysis.
Virgin group operates in market with some common features, where customers are under served, there is confusion or where the competition is contented (Grant, p811, 2010). Is this a selection criterion for Virgin to enter into a diversified market? Once entered Virgin is able to deliver good quality service, value for money, better customer service etc... Grant (2010) cites the diversification decision by firms involves two issues namely, how attractive the new industry would be and how to establish a competitive advantage with in the new industry. One of the major criteria for Branson to consider for diversification is the risk management. Shareholders manage different portfolios to do risk management in their investments. Similarly, managers or company owners like Branson should diversify their business to reduce risks.
Branson need to analyse the shareholder value for diversification decisions. Porter (Grant, p408, 2010) proposes the three “essential tests” to decide whether diversification creates shareholder value (As shown in Figure 1)
Figure -1 Source: www.contemporarystrategyanalysis.com 2010 Robert M. Grant
Branson can make use of the already existing internal capital markets for diversifications. This is an advantage to Virgin group when new diversifications are pursued (Grant, p413, 2010).
As mentioned earlier the financial reporting of Virgin companies is fragmented. Accounting details are not captured from a single holding company point of view. Tracking of financial results is highly complicated in such a scenario. The virgin brand power and Branson’s celebrity status helped Branson to acquire disproportionate equity stakes in the joint ventures (Grant, p819, 2010). In the longer term this poses serious strategic threats for the Virgin group. Its recommended for Branson and his group of companies to address these imbalances in the near future. The examples given in the case shows that there is a need of introducing better financial controls with in the group.
The virgin group provides one of the best places to work, a place where people are motivated to do their best (Grant, p818, 2010). At the same time, Branson sets high expectations from his employees including high level of commitment.
Minimum hierarchy is maintained in the organizational structure, which means short lines of communication and flexible response capability.
The virgin group of companies are controlled by over 20 holding companies. Each of them has its own assets, employees and produces various services (Grant, p816, 2010)
An illustration of the management structure as per the case is as shown the figure-2.
Figure-2
There are legal complexities involved in the management structure of Virgin group. So many chains of companies are in the hierarchy of owning the business and this loose-knit management structure is less transparent from outside. This type of structure is not advisable for any growing company, as the companies involved can adopt no centralized strategic decisions. Richard Branson may need to revisit his unconventional ideas of the current management structure.
