Virgin Atlantic - Strategic Memo

1998 was a rather trying year for Virgin group of companies.

With the hopes for an economic upturn still remaining, it is recommended that the Virgin group approach and review, with great urgency, the matters outlined in this memo. Questions have been raised by many noted publications including the Economist and Marketing News regarding the current financial state, brand strength and future of the Virgin group. Many has quipped Mr. Branson and the Virgin group as over-exerting and extending company resources, capabilities and competencies beyond a controllable and unprofitable threshold. Many critics have pointed to Virgin’s brand losing goodwill and compromising core values due to the brand stretching. With over 20 holding companies and 200 operating companies under the Virgin group umbrella, it is due time that we reevaluate each business organization and fully utilize the upcoming year restructure the Virgin brand and gain a new outlook for the millennium.

This memo is will focus on 4 sections - Internal audit, External Audit, Findings and Recommendations for the Virgin group. The thirteen (13) Virgin businesses included in this memo are Virgin Travel Group, Virgin Express, Virgin Retail, Virgin Our Price, Virgin Cinema, Virgin Hotels, Virgin Rail, Virgin Entertainment, V2 Music, Virgin Direct, Virgin Cola, Virgin Spirits and Victory Corporation.

I. Internal Audit

The Virgin brand name is highly respected, nonetheless, and the core constituent that drives the success of all the operating companies. Motivated by the group’s underlying focus on quality, innovation and differentiation efforts, the Virgin group has been very successfully in diversifying its businesses. However, at this moment, we are asked to pinpoint when diversification is too much. A brief core competency analysis shows that the Virgin group boasts core competencies that span across all the operating companies. Most remarkable, of course, is the influence of Mr. Branson’s unconventional management style, business philosophies, strategies and values. According to Mr. Branson, during his speech to the Institute of Directors in 1993, the key to success is “Staff first, then customers and shareholders.” This is the foundation of Virgin’s employees. Given creative freedom, full authority and motivation to build enterprises, all Virgin employees can run to become the next millionaire at Virgin.

As always, a concise mission statement will guide the company in fulfilling its vision. This excerpt is taken from Virgin.com:

“We believe in making a difference.”

“In our customers' eyes, Virgin stands for value for money, quality, innovation, fun and a sense of competitive challenge. We deliver a quality service by empowering our employees and we facilitate and monitor customer feedback to continually improve the customer's experience through innovation.”

From this mission statement, Virgin sets the stage on what the brand want to provide for the customer вЂ" value for money, quality, innovation, fun and competitive challenge.

Performance вЂ" Financial and Non-financial

With the complexity of Virgin group of companies and the habit of creating ad hoc financial reports, it is quite a task to summarize the financial performance. Each operating business is treated as a “stand-alone” entity and should be analyzed individually. For EBIT, Net Cash Flow and EVA for all included businesses, please refer to Table 1 in Appendix A. It is evident that some businesses are huge cash generators while others incur heavy losses. The following are a few highlights both financial and non-financial of the period of 1995 вЂ" 1997.

• Virgin Travel

o Sales increased 16.7%

o Profits increase to 40%

o Strongest profit generator!

• Virgin Atlantic

o Net borrowings have amounted to $500 ₤ millions reaching debt equity of 4:1 (200%). This is higher than the main competitor, British Airways, who sits at 145%.

o Increase transatlantic market share and Virgin garnered many awards for exceptional customer service.

• Virgin Retail Group

o Operating profits amount only to 2.2% of sales вЂ" very slim margins.

• Virgin Cola

o $5 ₤ millions in loss on $30 ₤ millions in revenue.

o Attained only 8% of market share.

• Virgin Rail

o Showed positive EBIT ($12.6 ₤ millions), Net Cash Flow ($7.5 ₤ millions) and EVA ($12.1 ₤ millions). However, Virgin Rail is plagued with operational deficiencies and future profits are questionable. Customer satisfaction is declining due to unreliable schedules and poor customer service.

As shown on Table 1, we can quickly acknowledge the financial health of the 13 businesses as indicated by the Net Cash Flow, EBIT and EVA. Virgin Travel Group is strong in all three indicators boasting EBIT ($51.5 ₤ millions), Net Cash Flow ($37.9 ₤ millions) and EVA ($32.5 ₤ millions). Most of the media-related Virgin endeavors, such as Cinema and retail, are all experience negative growth and troubled cash flows.

Value Chains

As an umbrella brand name, the number of value chains and links existing between customers and the Virgin group of companies and between each of the Virgin operating businesses increase as Virgin continues to implement diversification and market extension strategies. Goodwill is built by the company’s core values and product/service offerings. Most importantly, Virgin has been capable of sustaining the same values across each of the companies. With recent critiques of elasticity and stretching, Virgin’s goodwill has slightly been tarnished. However, it will not be a hard task to rejuvenate the brand.

Core Competencies

The Virgin group of companies, though diversified, shares many of the same core competencies; of course, distinctive competencies and competitive advantages may differ between the businesses. Core competencies of the Virgin