Diversification Strategy: Virgin Atlantic vs Virgin Cars

Introduction to Diversification Strategy

The Ansoff Matrix identifies diversification as one of four key strategies for company growth. According to Ansoff, diversification is quite different from the other three strategies. Product development, market penetration, and market development are typically handled from a technical, merchandising, and financial perspective using the same resources already available within a company. Diversification, however, requires the acquisition of an entirely new set of resources — including new techniques, new skills, and modern facilities.

Ansoff pointed out that in diversification, the notion that a product or service is "new" need not apply to managers but rather to the consumers of those products or services. When new products or services are created, they tend to encourage the acquisition of new markets, facilitate market penetration, and drive product development. Therefore, the other three strategies can emerge as a result of diversification (Ansoff, 1957).

Diversification is broadly comparable to the strategy of differentiation articulated by Michael Porter (1987).

Virgin Atlantic: A Successful Diversification Case Study

Many companies have successfully applied the diversification strategy, gaining improved market share and substantially increasing revenues and profits. An outstanding example is Virgin Atlantic. Operating in a market dominated by major carriers such as Delta Airlines, United Airlines, and US Airways, Virgin Atlantic gained popularity by leveraging diversification. The company emerged as the preferred carrier for short-haul flights by offering the cheapest fares and no-frills operations. Because the larger established airlines had not diversified their product offerings in the same way, Virgin Atlantic quickly became a significant player in the industry. The airline applied the same strategy in Europe, gaining considerable market share in a landscape that included larger players such as Brussels Airlines, British Airways, and Cathay Pacific.

Virgin Atlantic positioned itself as a budget airline. It is part of the Virgin Group, a private limited liability company founded by Sir Richard Branson in 1970 and incorporated in 1989. Virgin Atlantic itself was founded in 1984 and commenced operations on 22 June of that year. As of 2011, it operated a fleet of 37 aircraft serving approximately 35 destinations worldwide, with its headquarters located in Crawley, United Kingdom. According to the airline's 2011 financial results, revenue was £2.7 billion while operating income stood at £18.5 million (Branson, 2006).

In 2010, the airline carried over five million passengers and was named the eighth largest airline in the UK by passenger numbers. For the year ending February 2010, Virgin Atlantic recorded a turnover of £2.357 billion; however, despite this figure, the airline posted a loss of £132 million for that period.

Virgin Atlantic flies to destinations across the UK, Australia, the Caribbean, North America, the Middle East, Africa, and Asia. Its main bases are London Heathrow and Gatwick airports. The airline operates a mixed fleet of Boeing and Airbus jets with an average age of 9.1 years as of December 2011. The airline began from humble beginnings, with Richard Branson testing whether the venture could become profitable in its first year; if not, he planned to exit the market. Virgin Atlantic turned a profit in its first year, and funding to expand the fleet was subsequently arranged through its sister company, Virgin Records.

Virgin Atlantic has integrated online sales and the internet as its primary instrument for ticket sales, which has also helped reduce expenses such as ticketing staff costs and other overhead associated with offline sales (Halmen, 2006).

Factors Behind Virgin Atlantic's Success

Several factors contributed to Virgin Atlantic's success. First, the airline consistently uses a distinctive range of design elements across its aircraft. A dedicated in-house design team of 15 people works closely with the airline's chief executives to implement design projects. The team is multi-skilled, with expertise spanning architecture, interior design, and product and industrial design. Designers are tasked with creating unique elements that set Virgin Atlantic apart from competitors. For example, in November 2006, the airline installed wider economy-class seats featuring laptop power ports and lumbar support. Its business class offers the industry's largest fully flat-bed seats, complete with laptop power, lumbar support, and iPod power leads. In-flight entertainment is also provided across cabins. These product features give Virgin Atlantic a measurable competitive advantage (Halmen, 2006).

Second, Virgin Atlantic has effectively pursued cost leadership by systematically reducing expenditure. This includes maintaining low aircraft operation and maintenance costs through efficient fleet management, offering employees base-rate salaries supplemented by performance-based compensation, choosing cheaper airport options to keep charges down, and conducting sales operations online rather than through traditional offices — all of which reduce marketing and sales overhead.

Third, Virgin Atlantic handles most of its supply demands in-house. Rather than outsourcing the majority of its activities, the company has taken control of its procurement and supply chain, including its own catering and ticketing services. Virgin Atlantic also purchases goods in large quantities, allowing it to benefit from economies of scale (Balmforth, 2009).

Conclusion

Diversification as a strategy for business growth can give rise to highly successful companies. However, the strategy must be integrated with other complementary approaches in order for a business venture to achieve sustained success. This is clearly demonstrated by the case of Virgin Atlantic, which became an industry leader by combining diversification with cost leadership, innovative design, and strong supply chain management. By contrast, when diversification is executed poorly — without adequate planning, realistic forecasting, or attention to market conditions — it will lead to failure, as illustrated by the case of Virgin Cars.

References

Ansoff, I. (1957). Strategies for diversification. Harvard Business Review, 35(5), 113–124.

Balmforth, J. (2009). Virgin Atlantic. Midland Publishing Limited.

Branson, R. (2006). Virgin Atlantic Airways. Aviation Week & Space Technology, 165(13), 20.

Dominic, O. C. (2006). End of the road for Virgin Cars as Branson gets out. The Sunday Times.

Halmen, K. E. (2006). The effects of the corporate diversification trend on trademark. Marquette Intellectual Property Law Review, 10(3), 459–513.

Keeling, N. (2006). End of the road for Virgin Cars. Manchester Evening News.

Porter, M. (1987). From competitive advantage to corporate strategy. Harvard Business Review, May–June, 43–59.