Competitive Strategy and Innovation - Case Study Example

COMPETITIVE STRATEGY AND INNOVATION By Name Course Instructor Institution City/State Date Competitive Strategy and Innovation 1.0 Common Resources and Capabilities That Link the Separate Virgin Companies The firm’s resource-based view (RBV) indicates that certain forms of resources that a company owns and controls can result in a competitive advantage, which ultimately brings the RBV stresses that the firm’s resources are the main determinants of performance as well as competitive advantage. As pointed out by Grant (2016), when the rate of change in the company’s external environment is greater, there is a high likelihood that the internal resources, as well as capabilities, would offer a sound basis for long-term strategy. With the view to the Virgin companies, it is without a doubt that the company’s founder, Richard Branson is the main resource. This is mainly attributed to his strong leadership which has been crucial for the development of Virgin brand’s new capabilities. Branson is renowned worldwide for his unique entrepreneurial spirit and corporate culture. The second resource that links the separate Virgin companies is the ‘Virgin brand’, which is an intangible resource that has enabled Branson to establish other companies that represent value for money and quality of services. The brand has enabled the companies to grow and gain a competitive advantage over the competitors. The third resource is the finances, considering that Virgin companies’ financial reporting were fragmented; thus, making it challenging to locate. Additionally, financial reporting was not consolidated due to different financial years as well as the lack of public information (Grant, 2016). The last resource is innovation, bearing in mind that Branson's way of business was through Informality as well as disregard for convention. Branson has progressively become not just a charismatic leader at Virgin Group, but also strategic. As mentioned by Curlee and Gordon (2010), Richard Branson and Virgin brand are the two most crucial resources. Virgin Group’s capabilities demonstrate the aptitudes as well as the personality of Branson himself. Therefore, Branson can be defined as a self-publicist, a risk taker, and an entrepreneur. Virgin brand quickly is associated closely with Branson’s values and personality. The brand conveys innovative approaches, value for money, honesty, as well as customer satisfaction. Branson has through the brand institutionalised his marketing and entrepreneurial skills into numerous capabilities that are more systematised. This can be evidenced by the Group’s brand promotional and management capabilities, new business development capability, as well as the ability to enter into a partnership with other companies. Other capabilities linking the separate Virgin companies include the ability to identify Virgin frills, to expand the global presence, and improved marketing. Virgin Megastore and Virgin Records are two crucial business developments that enabled the Virgin brand to be where it is today. These businesses generated a ‘youthful’ image for the brand; therefore, the brand’s communication capability was connected to the social values. More importantly, the brand had no connection with any other market or product; therefore, it managed to differentiate itself by positioning small, customer-friendly and innovative companies. Virgin Group’s success can also be attributed to its organisational culture and structure. As mentioned by Owoyemi and Ekwoaba (2014), a culture is the basis of the organisation which describes the employees’ behaviour. Organisational culture can be described as the natural evolving system and enduring force that brings forth stability and order in the organisation, particularly with regard to an organisational network of human activities as well as interactions (Owoyemi & Ekwoaba, 2014). For the Virgin companies, organisational culture is an important and valuable resource associated with the brand’s traditions, values and social norms. Virgin Group’s capability to operate with much efficiency can be attributed to its organisational culture. Branson normally draws his inspirations from other people’s ideas, as evidenced by Virgin Bride which was an employee’s idea (Shavinina, 2013). Therefore, employees are very important resources for the group since they have continually worked hard to ensure the company succeeds. 2.0 Business That Branson Consider Divesting As mentioned by Johnson et al. (2011), the Virgin’s companies have not all been successful and some such as Virgin Rail and Virgin Media have failed to meet the customer service’s standards desired by Virgin Group. Branson has successfully created a reputation in the global market by overcoming the British Airways mighty ‘monopoly’; thus, facilitating the Virgin brand to develop into a renowned business empire. Virgin has over the years performed remarkably in establishing and managing new businesses, but a certain number of these businesses are no more economically viable. For this reason, Virgin has to divest these businesses, especially Virgin money and Virgin Airline. Furthermore, Virgin Group should consider divesting Virgin Airline since the airline industry has become capital intensive. This can be evidenced by the fact that Branson sold Virgin Music in 1992 despite the fact that it was his most successful and profitable business in order to fund Virgin Atlantic. Although the airline is still making a profit, it is not profitable as it was some years ago. This is attributed mainly to the fact that competition in the industry is tremendously high due to the entrance of low-cost carriers. Currently, nearly all airlines are trying to attract customers by offering unique packages and low prices. The airline business is further affected by deregulations, high taxes and the looming shortage of jet fuel. In consideration of these factors, Virgin group should divest the airline business. As mentioned by Thompson and Martin (2010), Branson investment in financial activities should be divested because customers prefer services and products from long-established institutions like banks. Given that the financial service industry is packed with more established companies, Branson investment in this industry is likely to fail. This is attributed to the fact the Virgin Group does not have the infrastructures needed to offer full banking activities. Therefore, Branson should divest the Virgin money. Topham (2014) posits that Branson has profited from a string of business ventures such as Virgin Media and Virgin Trains, but Virgin Atlantic Little Red failure demonstrates Branson inability to penetrate the lucrative markets such as alcohol and soft drinks. For this reason, Branson should consider divesting poor performing business in order to prevent their collapse as evidenced by Virgin Cola, Virgin Megastores, Virgin Bride, Virgin Cars, and Virgin Drinks (Grant, 2016). Mankins et al. (2008) emphasise that companies which pursue a disciplined approach towards divestiture are likely to sharpen their strategic focus and create much value for the shareholders. The majority of Branson’s new ventures collapsed prematurely; therefore, the company should divest Virgin Money and Virgin Airline before they start losing money. Factors that led to new ventures include privatisation and deregulation; deregulation focus on the legal framework that guides the market environment while privatisation is associated with transferring enterprises ownership from the government to private owner (Kalejaiye et al., 2013). Virgin entry into the air travel was potentially the riskiest and biggest, diversification of the 1990s while the Virgin Rail was affected by UK’s privatisation of its rail network. 2.1 Criteria to Be Used While Deciding What New Diversification Strategy to Pursue Diversification, according to Pandya and Rao (1998) connotes the way through which a company expands into other product from its core business. The geographic diversification as well as product diversification has an enormous impact on corporate performance (Hilman, 2015; Asrarhaghighi et al., 2013). Risk reduction strategy, as mentioned by Grant (2016), is a suitable way for the shareholders to spread risks. In view of this, Virgin Group’s diversification analysis must point out the circumstances through which the multi-business activity could generate value. According to Grant (2016), Porter's essential tests can be used to determine whether the diversification would generate shareholder value. The Porter's essential tests include the better off test, the cost of entry test as well as the attractiveness test (Grant, 2016). Failure to diversify the business risks can make the companies to practically become prisoners in their industry (Markides, 1997). Most of the Virgin companies have successfully been built from ground-up, but in this case, diversifying through a strategic alliance with companies that have capabilities and resources could be more beneficial (Wells, 2000). The strategic alliance is something common in the Virgin Group since Indian Virgin mobile was established through an alliance with Tata. For this reason, Virgin Group should enter an alliance with well-established companies that have the resources and capabilities in the financial service industry and airline industry. Some of the key factors that Branson should consider for the diversification include the brand extension, innovation, the attractiveness of the industry, the core resources and capabilities required for diversification process, internal labour markets, as well as the parenting advantage. In view of these factors, Virgin Group should avoid dissolution because it will negatively affect the brand name; therefore, a strategic alliance is the most suitable way to diversify since the company will manage to protect its image and would gain sustainable competitive advantage. 3.0 Recommendation for Changes in the Organisational Structure and Management Systems of the Virgin Group According to Grandori and Giordani (2011), the operating styles of Virgin companies have been designed by Branson. However, technology advancement has changed everything; therefore, Virgin must change its financial structure. This can be achieved by looking into the group as well as divesting or consolidating well-performing companies. Consolidation could be beneficial because it would obtain Virgin Group to get tax relief from its loss-making companies. Even though Branson has continually argued that Virgin companies are operating on a standalone basis, consolidating numerous businesses like Victory Corporation, Virgin Atlantic, and Virgin Retail could result in more financial stability. More importantly, this would reduce the overhead associated with operating multi businesses as well as offering customers a different range of services. The available financial data of Virgin group is limited but there is evidence of financial precariousness owing to the failure of numerous new ventures. Given that each Virgin company is funded independently, there is a high possibility that the companies cost of capital is higher than the required level. Therefore, Virgin group should create a single holding company, or make sure that Virgin companies that are most capital-intensive are launched as initial public offerings (IPOs). As pointed out by Feloni (2015), Virgin Group is a successful brand of numerous companies that operate independently and the brand’s organisational structure was created by Branson. To remain successful, Virgin must allow other small companies to use its brand name through franchise so as to get royalties. The Virgin brand as mentioned earlier is a valuable resource; therefore, franchising would help Virgin to reduce business risks and get money to run other profitable businesses. Scores of companies such as McDonald's have successfully globalised their businesses through franchising. There is a need for changes on the group’s structure; therefore, it is imperative to identify the tasks which have to be performed in controlling and coordinating the Virgin companies. Such tasks include: protecting the brand considering that currently, it is unclear who the owner of the Virgin trademark is and there are no clear stipulated terms under for all the companies using the Virgin brand. Therefore, the brand must be protected by controlling how the brand is presented and allowing for consistency in the image projected by Virgin brand across all the companies. Besides that, the company should ensure management continuity and control by monitoring the performance of all the companies to facilitate the retention of the entrepreneurial culture. Virgin Group’s management structure has since its establishment centred on Branson and has continually operated with little management systems or formal structure. Given that Virgin Group big and diverse, it should adopt the top-bottom management system rather than being run only by Branson and his close associates (Gordon, 2014). The group needs a well-detailed structure of management rather than no-headquarters and no-building form management. Although the current management system has been successful under Branson, there is no guarantee that means it would be effective after him. Given that Virgin Group is a multinational company it should not be a one-man business; it should adopt a systematic as well as a centralised management system for the future without Branson. Centralised management would be beneficial for the group because everything will be controlled from one place in an efficient and simple way. References Asrarhaghighi, E., Rahman, A.A., Sambasivan, M. & Mohamed, Z.A., 2013. Diversification strategy and performance studies: Results, measures, and sampling design. Journal of Advanced Management Science, vol. 1, no. 1, pp.12-18. Curlee, W. & Gordon, R.L., 2010. Complexity Theory and Project Management. Hoboken, New Jersey: John Wiley & Sons. Feloni, R., 2015. Why Richard Branson is so successful. [Online] Available at: HYPERLINK "http://uk.businessinsider.com/how-richard-branson-maintains-the-virgin-group-2015-2?IR=T" http://uk.businessinsider.com/how-richard-branson-maintains-the-virgin-group-2015-2?IR=T [Accessed 5 July 2017]. Gordon, S., 2014. Virgin group: Brand it like Branson. [Online] Available at: HYPERLINK "https://www.ft.com/content/4d4fb05e-64cd-11e4-bb43-00144feabdc0?mhq5j=e2" https://www.ft.com/content/4d4fb05e-64cd-11e4-bb43-00144feabdc0?mhq5j=e2 [Accessed 5 July 2017]. Grandori, A. & Giordani, L.G., 2011. Organizing Entrepreneurship. New York: Routledge. Grant, R.M., 2016. Contemporary Strategy Analysis Text and cases. 9th ed. Hoboken, New Jersey: John Wiley & Sons Ltd. Hilman, H., 2015. Significance of Studying Product Diversification, Geographic Diversification, and Their Interaction Impacts for Malaysian Companies: A Literature Review. Asian Social Science, vol. 11, no. 10, pp.238-50. Ismail, A.I., Rose, R.C., Uli, J. & Abdullah, H., 2012. The Relationship Between Organisational Resources, Capabilities, Systems And Competitive Advantage. Asian Academy of Management Journal, vol. 17, no. 1, pp.151–73. Johnson, G., Whittington, R. & Scholes, K., 2011. Exploring Strategy. 9th ed. London: FT Prentice Hall. Kalejaiye, P.O., Adebayo, K. & Lawal, O., 2013. Whereas deregulation deals with thelegal framework of market environment, privatization relates to transfer of ownership of enterprises from the government to private owner(s). African Journal of Business Management, vol. 7, no. 25, pp.2403-09. Mankins, M., Harding, D. & Weddigen, R.-M., 2008. How the Best Divest. [Online] Available at: HYPERLINK "https://hbr.org/2008/10/how-the-best-divest" https://hbr.org/2008/10/how-the-best-divest [Accessed 5 July 2017]. Markides, C.C., 1997. To Diversify or Not To Diversify. [Online] Available at: HYPERLINK "https://hbr.org/1997/11/to-diversify-or-not-to-diversify" https://hbr.org/1997/11/to-diversify-or-not-to-diversify [Accessed 5 July 2017]. Owoyemi, O. & Ekwoaba, J.O., 2014. Organisational Culture: A Tool for Management to Control, Motivate and Enhance Employees’ Performance. American Journal of Business and Management, vol. 3, no. 3, pp.168-77. Pandya, A.M. & Rao, N.V., 1998. DIVERSIFICATION AND FIRM PERFORMANCE: AN EMPIRICAL EVALUATION. Journal of Financial and Strategic Decisions, vol. 11, no. 2, pp.67-81. Shavinina, L.V., 2013. The Routledge International Handbook of Innovation Education. New York: Routledge. Thompson, J.L. & Martin, F., 2010. Strategic Management: Awareness & Change. Andover: Cengage Learning EMEA. Topham, G., 2014. Sir Richard Branson’s setbacks: from Virgin Cola to Virgin Brides. [Online] Available at: HYPERLINK "https://www.theguardian.com/business/2014/oct/06/sir-richard-branson-failures-vigin-cola-brides" https://www.theguardian.com/business/2014/oct/06/sir-richard-branson-failures-vigin-cola-brides [Accessed 5 July 2017]. Wells, M., 2000. Red Baron. [Online] Available at: HYPERLINK "https://www.forbes.com/forbes/2000/0703/6601150a.html" https://www.forbes.com/forbes/2000/0703/6601150a.html [Accessed 5 July 2017]. Read More