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Diversification Part Of Investment Strategy

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Question:

Discuss About The Diversification Part Of Investment Strategy.

 

Answer:

Introduction

This report is being presented in order to analyse the case study of Virgin Group and identify its resources and capability, in which business area Virgin should divest its operations and its criteria. Besides this, the report will also recommend some of the changes in the organizational structure and management systems company should make.

Virgin Company was launched by Richard Branson in 1970 as a company of mail order for the sake of selling records. The name of the company was recommended by Mr Branson’s associate and was accepted as announcing their commercial virtue, while owning some innovative and modest shock value (CWTEMP, 2016). The company has developed rapidly over the years and converted into a top branded venture which expanded into various businesses. Currently, Virgin is broadly known and is one of the most appreciated brands owing to effectively developed business in regions like telecom, music, the airline industry, financial services, etc. (Murphy, 2008) Till date, the company has around 200 individual firms that are controlled by 20 holding businesses which operate under one roof i.e. Virgin (Virgin 2018).

 

Resources and Capabilities

Resources and capabilities are defined as productive assets possessed by a company or firm and what it can do with them (MBA Skool, 2017). Resources do not get productive themselves; they have to be transformed into capabilities by co-ordination and management. For an organization to attain competitive advantage, the company needs to be focused towards its main strengths in capabilities and resources and confirm that both should operate together in place of operating in isolation. In the Virgin Group’s case study, one key resource is its creator or founder i.e. Branson, who started the company in 1970. His effective leadership is vital for emerging new Virgin capabilities (Grant, 2018). As noted, his power as a businessman was in considering and executing new ideas of business. Richard Branson is not just the founder; he is also called as an initiator and main financier in the company. His eagerness and dedication for business resulted in launching a range or series of various Virgin companies like Virgin Rail, Virgin Records, Virgin Cola, Virgin Airlines, etc.

Another link is the Brand Virgin. Trademarks and names of the Brand are a form of prestigious or reputational asset, its value is reflected through the confidence they build in the customers. The appreciated Virgin’s asset is its brand. It has been noted that the characteristics and values that the brand of the Virgin transferred are inseparable from Branson. The brand of Virgin was recognised with progressive strategies and innovation and advertising that characterised maximum of the Virgin start-ups. With the help of the brand the group is able to marketing its other companies representing the service quality and worth of money. It allowed them to make a series of services and products in other markets. However the name of the brand is said to an intangible asset but sometimes the organizational growth value and competitive advantage can be immeasurable.

The company’s success to create an effective consumer brands has an influential incentive to expand in which the Virgin group has gained success (Kislaya, 2017). The Virgin brand permitted the whole group to differentiate to dissimilar areas of business in the nations across the world such as the Japan, Australia, Hong Kong, US, Singapore etc. (Springer, 2018).   

The virgin’s success can be outlined in its organizational culture and structure. The culture of the organization is a company’s resources and capabilities which are of great strategic significance that is possibly very treasured and associated with its social norms, traditions, and values. The ability of the Virgin to function efficiently with little official structure or management systems is just due to its culture as determined by the management style and value of Branson (Sadq, 2016). He is the one who draws motivations from the thoughts of others people and encouraged proposal of new ideas of business. Employees in the organization are motivated to grow ideas of business for fresh businesses. Personnel have stakes in the organization and try to make the company thrive, permitting them to handle and control the company and enjoy the profits of their achievement.

 

BCG Matrix

Boston Consulting Group (BCG) Matrix is a four-celled matrix (2*2 matrix) established by BCG, USA. It offers a graphic depiction for an organization to inspect diverse business in its collection or portfolio depending on their associated market share and growth rate of the industry (Management Study Guide, 2018). Along with this, it is also said as a comparative examination of the potential of the business and the environmental evaluation. According to this matrix, a business can be categorized as high or low depending on their relative market share and industry growth rate.

In the BCG Matrix, there are four cells, along with vertical axis which represents a growth rate of the market and horizontal axis reflects relative market share. The resources are assigned to the units of business as per their position or situation on the grid (Jurevicius, 2013).

Stars- Stars reflects those units of the business that possesses a huge market share in the growing industry. They might help in generating cash but due to quick-growing market, stars need high investments in order to uphold their leading position (Martin, 2017). Business units of Virgin Group that will lie under this cell are profit-making as they are placed in a strong industry and these types of units are very competitive.

Cash Cows- Cash cows reflect those business units that have a huge market share in a slow-growing and mature industry. Cash cows need slight investment and produce cash that can be utilized for investment in different business units. These types of business general use stability strategies. At the time when cash cows drop their attractiveness and move in the direction of declining stage, then the policy of retrenchment can be followed by the Virgin Group.

Question Marks- Question mark reflects those units of business that possess low relative market share and placed in an industry with high growth. These types of business units of Virgin Group will require high investment in order to gain and maintain market share.

Dogs- Dogs reflects those business units that possess a feeble market share in the markets with low-growth (Hanlon, 2017). They neither make cash nor need investment. Because of less market share, these type of business unit deals with cost disadvantages. Normally divestment strategy adopted because these types of firms can gain market share only on the competitor’s expense.

Virgin Group involve various business units, some of them are working properly but some of them are facing losses and will not be able to survive in the market considering the future aspects due to huge competition and changing the environment. These business units' lies under Dog cell which suggests that company should divest those units. Some of them are Virgin money, Virgin airline, and Virgin Cola.   

Divestment

Virgin Group has performed effectively in the management and establishment of new business since many years; however few of its business units are not performing the way they use to considering the present economic downturn in the world.  Virgin should see inward and look few of its business ventures that presently are economically feasible and need to think about divestment. Some of them must be noticed such as Virgin Money, Virgin airline, Virgin cola etc. The airline industry was dominated by Virgin because of its style of management and serving consumers their money's value, however, this came at a price. The industry of airline is capital concentrated. The statistics reflect that Branson sold his most successful and profitable business in 1992 i.e. Virgin Music for £ 560 million to fund Virgin Atlantic. However, the Virgin airlines still make revenue but not as it used to. People do not travel much and competition in the whole industry is extensive. Currently, airlines are often attempting to attract customers by providing unique packages and low prices, compounded with alternatives to air travel etc. There are various factors influencing the air travel profitability like high jet fuel price, government deregulations, and regulations, taxes etc. (Leigh Fisher, 2011). Considering this, it will be effective for Virgin group and Branson to divest its Airline business.

All the time Branson is called as attempting to ‘stick it the big boys’, but his participation in the financial activities look to be a trade that must be left to the big boys by depriving and focusing on other business areas. Consumers will select services and products from those institutions that have a good and long history such as financial institutions and banks. With extra recognized companies in the market, his participation is a little complicated. Virgin is not called as a bank and does not possess complete infrastructure in order to confirm complete activities of banking, and as an outcome its hard work to tender for the 318 branches of RBS in Wales and England got unsuccessful, and has taken over by Santander a Spanish banking giant (Treanor, 2010). This is a strong signal for founder of Virgin to divest its Virgin money business unit.

Another effort of Richard Branson is Virgin Cola to ‘stick it to the big boys’ must also look towards divestment (Morschett, Klein and Zentes, 2011). It is known that brands get unsuccessful when they transfer into unfamiliar territories. Although the Virgin cola can be inexpensive as compared to Pepsi and Coca-Cola, these are two giant coke makers that are famous worldwide. It will be very difficult, maybe not possible for Virgin Cola to create an influence competitively in the global market. Pepsi and Coke consider rivalry seriously and do not bend arms though Virgin Cola attempt to remove them (Smith, 2017). It is assumed that tough brand exploits player’s flaws. Virgin is a tough brand; however, its Virgin Cola brand is not so strong in front of Pepsi and Coca-Cola.

Criteria for deciding new Diversification Strategy

As an outcome of Modification or diversification, a company can enlarge its series or range of services and products and vend to existing consumers or make new marketplaces in a diverse area of the world thus growing worth and development (Markgraf, 2018). Besides this, diversification is a strategy of risk reduction that allows shareholders spread risks. It has been noted that the emphasis of diversification examination is on recognizing the situations in which various activities of a business can make value (Riddix, 2011). In order to define whether diversification will make shareholder value or not, Porter’s essential test must be applied by the Virgin Group. This test involves three tests i.e. the attractive test, the cost of entry test, and the better off test.

The attractive test- The industry needs to be operationally and structurally attractive and appealing or should have the probability or potential to get converted into the attractive industry. Virgin Group can adopt this test in order to identify the new market or product that is more attractive and profitable.

The cost of entry test- The entry cost should not consume total future profits. This test will help Virgin to identify the entry cost in different market or product.  

The better of test- Either the novel unit of business or the company must attain competitive advantage from the connection (Martin, 2018). This test will help Virgin Group to identify that new business unit that may achieve competitive advantage in the future.

Deprived of diversification, companies are almost prisoners in their industry. Branson effectively constructed companies from ground-up however strategic alliance with companies having capabilities and resources can be valuable. Branson knows well about Alliance. In 2007, he discussed an alliance with one of the Indian Company i.e. Tata in order to launch Indian Virgin mobile. Branson must follow the same strategy i.e. by diversifying into the constructions of the road in a country such as Nigeria. An alliance with existing Nigeria Company with the capabilities and resources like China's Shanghai Shibang Machinery business (SBM) will be perfect. SBM offers a huge amount of stone crushers, machines of sand making, and machines of grinding to the construction companies. Virgin has economies of scope as an outcome of intangible and tangible resource because of its brand; this can be used to enhance value by franchising and licensing.

Branson has designed the operating styles of Virgin. Today everything is different therefore Virgin must modify its financial structure. Branson must focus inside of its business and combine or divest business units that are not able to provide expected results. It has been noted that to get some relief in tax from the loss-making firms of Virgin it is important to consolidate. Branson says that companies of Virgin function on an individual basis, however, an alliance of some in similar companies like Virgin Express, Virgin Atlantic, Virgin Retail, Virgin Blue and Victory Corporation will make more financial strength. Along with this, it will help in cutting down the overhead of directing multi trades and provide customers more varied service range.

 

Recommendations for the Changes in Management System and Organizational Structure

Virgin is a prosperous brand of small firms that operated self-sufficiently, and the organizational structure is designed by Branson. The structure of the company has performed to some extent however Virgin must permit its name of the brand to be utilized by small worthy company franchise and gather royalties. It is known that the brand of Virgin is very precious. The advantage of franchising that the brand i.e. Virgin might decrease risk, offer cash which is needed to operate other moneymaking businesses, observe growing business with little participation, easily expand in other trades and move into the new markets and in new countries. Franchising is a significant source of new products concept and source of the new market. Various firms have performed well with a franchise like Trump Hotels, McDonald's etc.

The Virgin's management structure has been based on one single man. Branson functioned with slight management systems or official structure; this will not remain for a longer period. A large organization like Virgin must have a system of top-bottom management in spite of that system in which decisions are being taken by Branson. It is very vital to have a wide and thorough management structure in place of no headquarters, and no-building kind of management he runs. The structure might have operated under Branson well does not reflect that it will perform effectively after him. Virgin should not be considered as a one-man company, it is a big multi-national company. If Branson become less lively or active as director of public relations, chief entrepreneur, and strategy architect, deprived of a distinct management structure in operation, who will take his position and responsibilities. A centralized and organized method of handling the future without Mr. Branson is what Virgin needs to be like Apple Inc.

 

Conclusion

From the above analysis, it can be concluded that Virgin is a well-known company and operate in various business segments however it has few of the business such as Virgin Cola, Virgin Money, and Virgin Airlines which are not providing more profit to the company. Therefore in the above report, BCG Matric has been explained which help in identifying the market growth and market share of the company and according to that these all specified business lie under Dog cell which suggests that all these business units need to be divested by Branson. Besides this Porter three essential tests have been explained that will help company in selecting new business market. In the end, recommendations have been provided for the changes in management system and organizational structure of Virgin.

 

References

CWTEMP (2016) Virgin Company Profile [online]. Available from https://corporatewatch.org/virgin-company-profile/ [Accessed 22 April 2018]

Grant, R.M. (2018) Richard Branson and the Virgin Group of Companies in 2007 [online]. Available from https://www.blackwellpublishing.com/content/GrantContemporaryStrategyAnalysis/6th_Edition/case_teaching_notes/CSA6CaseNotes_16.pdf [Accessed 22 April 2018]

Hanlon, A. (2017) How to use the BCG Matrix model [online]. Available from https://www.smartinsights.com/marketing-planning/marketing-models/use-bcg-matrix/ [Accessed 22 April 2018]

Jurevicius, O. (2013) BCG growth-share matrix [online]. Available from https://www.strategicmanagementinsight.com/tools/bcg-matrix-growth-share.html [Accessed 22 April 2018]

Kislaya, A. (2017) Virgin Group: Corporate Strategy & Unrelated Diversification [online]. Available from https://ankurkislaya.wordpress.com/2017/10/17/virgin-group-corporate-strategy-unrelated-diversification/ [Accessed 22 April 2018]

Leigh Fisher (2011) The New Drivers of Airline Profitability Influence Service Decisions [online]. Available from https://www.leighfisher.com/sites/default/files/free_files/focus_-_new_drivers_of_airline_profitability_-_nov_2011.pdf [Accessed 22 April 2018]

Management Study Guide (2018) BCG Matrix [online]. Available from https://www.managementstudyguide.com/bcg-matrix.htm [Accessed 22 April 2018]

Markgraf, B. (2018) Diversification as a Marketing Strategy [online]. Available from https://smallbusiness.chron.com/diversification-marketing-strategy-65445.html [Accessed 22 April 2018]

Martin, J.R. (2018) Porter, M. E. 1987. From competitive advantage to competitive strategy. Harvard Business Review (May-June): 43-59 [online]. Available from https://maaw.info/ArticleSummaries/ArtSumPorter1987.htm [Accessed 22 April 2018]

Martin, M. (2017) What Is a BCG Matrix? [online]. Available from https://www.businessnewsdaily.com/5693-bcg-matrix.html [Accessed 22 April 2018]

MBA Skool (2017) Resources and Capabilities [online]. Available from https://www.mbaskool.com/business-concepts/marketing-and-strategy-terms/7499-resources-and-capabilities.html [Accessed 22 April 2018]

Morschett, D., Klein, H.S., and Zentes, J. (2011) Strategic International Management: Text and Cases. 4th edn. Germany: Springer Science & Business Media.

Murphy, R.E. (2008) Virgin Group of Companies [online]. Available from https://www.richardmurphy.us/Global%20Strategy%20of%20Virgin%20Group.pdf [Accessed 22 April 2018]

Riddix, M. (2011) 3 Advantages of Diversification as Part of your Investment Strategy [online]. Available from https://www.benzinga.com/economics/11/09/1897071/3-advantages-of-diversification-as-part-of-your-investment-strategy [Accessed 22 April 2018]

Sadq, Z.M. (2016) Virgin Group Success Businesses: Diversification, and Key Strengths. Account and Financial Management Journal, 1(2), 78-83.

Seek Logo (2018) Virgin Group Vector Logo [online]. Available from https://www.seeklogo.net/communication-logos/virgin-group-49280.html [Accessed 22 April 2018] 

Smith, E. (2017) Rethinking Sugar Water [online]. Available from https://tedium.co/2017/11/02/virgin-cola-history/ [Accessed 22 April 2018]

Springer (2018) Survey on cognitive process differences between Westerners and Asians [online]. Available from https://link.springer.com/content/pdf/bbm%3A978-0-230-30697-4%2F1.pdf [Accessed 22 April 2018] 

Treanor, J. (2010) Virgin Money and Santander bid for Royal Bank of Scotland branches [online]. Available from https://www.theguardian.com/business/2010/apr/06/virgin-santander-bid-rbs-branches [Accessed 22 April 2018]

Virgin (2018) About us [online]. Available from https://www.virgin.com/virgingroup/content/our-brand-0 [Accessed 22 April 2018]

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