The Virgin Group: Vertical Hierarchical Organization Report

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Table of Contents

Introduction
Case Study: Virgin Group
Conclusion
Reference List

Introduction

Currently, Virgin Group is a multinational conglomerate that incorporates a wide array of businesses and subsidiaries from various industries. While such an approach is considered an advantage due to the diversification capacity it provides, it also poses a significant threat to the viability of the profitability of the enterprise. The paper identifies viable opportunities for divestment, lists criteria for selecting the diversification strategy, and offers recommendations regarding the changes in the group’s organizational structure and management systems.

Case Study: Virgin Group

In the case of Virgin Group, many of the currently owned businesses are in decline or perform relatively modestly. The best example of such underperformance is Virgin Atlantic, an airline and one of the most recognizable brands owned by the company. According to the recent statement from the company representatives, Virgin Atlantic is expected to incur losses by the end of 2017 (Hackett 2016). It should be pointed out that this is not the first setback of such kind and was predated by a major drop in revenues in 2010 and relatively modest profitability in the previous years (CAPA 2014). A similar situation was reported by Virgin Australia, the country’s second-largest carrier, which had become free-cash-flow positive only recently, after several years of underperformance (Hatch 2017). Several attempts were made to curb the losses by scaling down the operations, but the issue remains unaddressed.

Considering the information above, it becomes apparent that the airline business is the most appropriate candidate for divestment. The first reason for this choice is the rising concerns regarding the high carbon-emitting industries. The gradual increase in awareness regarding the issues of energy efficiency and environmental friendliness has led to the establishment of numerous regulations (Virgin n.d.a). In response, several new entrants have emerged in the field, capitalizing on efficiency and affordability. This move aligns well with the dominant public perception that favors “green” transportation over its inefficient traditional counterpart.

In this light, the described divestment is advantageous for two reasons. First, it would improve the value of the Virgin Group. The reputation of the conglomerate as a source of innovation is already marred by numerous connections to industries that are already considered obsolete. In this regard, Virgin Atlantic does not have a positive contribution to the value chain. Second, the divestment would allow selling the assets at a reasonable price due to the early stage of the ongoing decline. The assets can then be added to the fund intended for future growth.

It is also necessary to understand that despite the multitude of entities that currently form the conglomerate, it is still possible to diversify it in a way that would add value to the enterprise. However, the success of the endeavor will depend on the use of an appropriate diversification strategy. A range of criteria can be recommended to assist the process.

The first criterion for deciding on the diversification strategy is the attractiveness of the entry. The focus on the value of the offered product or service characteristic for the modern business environment creates a situation where the attractiveness of the new enterprise is determined by what it can offer to customers. The current business landscape contains numerous examples of businesses that capitalize on this criterion and demonstrate significant growth in a relatively short time. On the other hand, it is necessary to acknowledge that at least in some cases, the attractiveness is based on the short-lived factors and does not constitute proof of long-term viability.

The second criterion that should be taken into consideration is the issue of entry cost. Some industries, including the aerospace travel mentioned in the previous segment, contain several restrictive requirements that prohibit small players from entry whereas their attractiveness from the customers’ standpoint shows signs of deterioration. On the other hand, some of the emerging fields, particularly those from the information technology domain, have no significant entry barrier. However, they are equally attractive in terms of value potential. For an average company seeking to diversify its business, the latter seems to be the preferred option due to the high return on investment in the short and medium-term. However, it is also important to understand that Virgin has the resources and experience necessary for operating in segments characterized by high entry barriers and a small number of major competitors.

The third criterion is the relative profitability of the diversification compared to their independent operation. In other words, it accounts for the expected effect of owning two different products. For instance, the diversification in the direction favorable for both companies may add value and expand their business opportunities. An example of this is a retail company that diversifies by acquiring a delivery service and utilizes it for small-scale individual orders by integrating the functionality of the newly acquired firm. This criterion is typically considered the most important one since it allows estimating the change in the value of an investment in combination with the available assets (Grant 2010). Thus, it should be prioritized in the decision-making process behind the choice of a diversification strategy.

Finally, it is necessary to review the current organizational structure of the Virgin group and identify the possibility of improvement. Currently, the conglomerate is comprised of several organizations that operate relatively independently. Considering the scope of Virgin Group’s operations and the differences between its subsidiaries, such a structure is a necessity. Nevertheless, it creates significant challenges in communication, coordination of operations, and accountability. Thus, while the overall organizational concept is acceptable, it may benefit from refinement.

From the information above, it is apparent that while the individual companies within it often have a vertical hierarchical organization, on a strategic level Virgin Group still resembles a flat organization. However, the complexity of implementing a flat structure increases with the size of an entity, which means that common flat structures such as flat arches and holacratic models are unsuitable for the purpose. Thus, it would be reasonable to adopt a keiretsu structure. This type is used when several relatively independent entities want to preserve their autonomy while at the same time being able to coordinate their actions (Virgin n.d.b). Since the members of the group produce sufficiently different products, the coordination will mostly serve the purpose of obtaining strategic direction and working in unison for the benefit of the group. Specifically, the proposed organizational structure would offer advantages in terms of adaptability and capacity for change. Virgin Group is known for its focus on innovation, which, in turn, requires a considerable degree of coordination for a successful transition.

Conclusion

As can be seen, the proposed change targets mostly the strategic level of the conglomerate. The reason for this is the diversity of the management systems used by the group’s members. Therefore, the changes in the latter are not recommended on a universal basis – instead, it is recommended to entrust the managerial aspect to the individual members. In this way, they will retain autonomy while at the same time embrace responsibility for individual performance.