Strategic Management and Virgin Australia

Summary

The purpose of this report was to provide a strategic evaluation of the company Virgin Australia. The report begins by conducting a strategic analysis of Virgin, including an analysis of the external environment and an internal analysis of competitive strengths and weaknesses. The report then identifies the strategic direction and objectives of Virgin Australia, including the vision, mission, strategic objectives and stakeholders of the company.

The report moves on to explore strategic choices of Virgin Australia by identifying the key broad business level and international strategies of the company. From this analysis the report then provides a general perspective of the strategic implementation of Virgin by assessing evidence of mismatch between environmental turbulence and business strategy, transformational strategic change and second curve activity. In addressing strategic implementation issues the report addresses McKinsey;s 7 forces model before identifying the following strategic implementation issues:

• Customer Composition and Timing
• Management and strategic consensus
• Inability to use strategic alliance tool successfully

In the final section the report conducts a strategic evaluation assessing overall performance and measuring performance through triple bottom line reporting and the balanced scorecard approach. The report concludes that Virgin Australia is in a stable strategic position and that their transformational strategic change from a low cost airline to a corporate travel service has been beneficial for the company.

By maintaining their strategic goals and addressing the implementation issues identified in this report, Virgin Australia is in an excellent position to expand within the Australian domestic market. Table of Contents

Today Virgin Australia operates under the chairman of the Virgin group Sir Richard Branson and is owned by Virgin Blue Holdings, formally Virgin Blue Airlines. Under the brand name is V Australia and Pacific Blue, from which Virgin Australia flies its main aircraft the Boeing 777-300ER, offering 33 Business Class lie-flat beds, 40 premium economy club seats and 228 economy seats. Virgin Australia has significantly increased its employees to around 50,000 in just 12 short years.

The reported earnings for the 2011 financial year was a loss of $67. million, compared to a great result the year before, in 2010, with a profit of $21. 3 million, and 2009 being a large loss of $160. 0 million. Virgin Australia’s most recent reported earnings, as of December 2011, is a profit of $51. 8 million, leaving them in a very sustained and stable position. This report will cover the strategic analysis, direction and objectives of Virgin, the key broad business level and international strategies, the strategic implementation and the issues it brings along with it, and finally, the strategic evaluation.

Strategic Analysis

External Analysis

The PESTEL model refers to factors in the external environment that have an effect on Virgin Australia.

The most relevant factors of the model include the political, economic, technological and environmental elements. In terms of political factors that will affect the airline industry, the introduction of the carbon tax in the Australia will impact the firm by increasing expenses as Virgin is taxed on its levels of carbon emissions. In order to cover these expenses, costs will be passed on to the consumer in the form of increased ticket prices. ABC 2011) Other taxes associated with the airline industry include fuel and landing taxes imposed by foreign countries. Economic impacts are a significant factor to consider for any firm operating within the global marketplace. In terms of the aviation industry, the changing price of oil and associated taxes are a prominent issue. Also, the global economic environment is important to consider, including changing interest rates and the value of the Australian dollar. In recent times there has been a considerable focus on the environment and ensuring environmentally safe and sustainable procedures and practices.

In an attempt to be more environmentally friendly, Virgin has introduced the 787 Dreamliner aircraft for international flights which improves fuel efficiency by utilising lighter materials and incorporating highly advanced aerodynamics. The new aircraft also uses fewer hazardous materials and creates fewer waste products. (Virgin Atlantic, 2007). “The demonstration, using a Boeing 747-400, will be the first worldwide by any commercial airline and aim to develop sustainable fuel sources suitable for commercial jet engines and the aviation industry.

The demonstration forms part of Virgin Atlantic’s vision for what the aviation industry can achieve by using clean-fuel technology to reduce carbon emissions and should encourage a faster pace of development for the industry. ” (Virgin Atlantic, 2007). Virgin’s dedication to the environment is evident in that the firm has volunteered to pay the carbon tax and has lobbied to be included in the scheme. (Probyn, A, 2011. ) The topic of advancing technology in today’s society is a significant factor affecting a firm.

In relation to the aviation industry, the most pressing issue relates to that of oil costs which affects the price of fuel. In an attempt to create both a more efficient, cheaper and environmentally friendly product, there is a focus on technological improvements to both aircraft and engine design. Another important technological factor to consider given the ability to create cheaper products is that of lower barriers for competitors to join the industry.

Specific Environment Porters 5 Forces Model

Porter’s 5 forces model presents a framework that shows an industry being influenced by 5 predominant forces which include supplier power, threat of new entrants, threat of substitutes, buyer power, and degree of rivalry. “It depicts the whole vertical chain of economic activity running from suppliers through businesses and on to consumers. ” (Brandenburger, 2002). Of particular relevance to Virgin Australia is the degree of rivalry, threat of substitutes, supplier power and threat of new entrants. The degree of rivalry is particularly important in the aviation industry as it is a highly competitive market.

In order to gain a competitive advantage over other airlines including Jetstar and Qantas, Virgin Australia needs to offer product differentiation or a variation in price. The high exit barriers within the aviation industry make the market more competitive. The threat of substitutes refers to products available in other industries. The price elasticity of a product is therefore considered. As more alternatives become available such as rail, sea or other vehicles, the demand becomes more elastic as consumers have more alternatives.

It is important to consider the consumer’s time, money, personal preference and convenience. (Investopedia 2012). Supplier power refers to the ability of the supplier to put pressure on the business and to supply the product at a particular price, given the demand and quality of the product. The airline supply is mainly dominated by Boeing and Airbus which has significant power in supplying the product. (Investopedia 2012). Another major supplier in the aviation industry and therefore affecting Virgin is the fuel industry, which relies on oil supply.

The lack of substitutes means that fuel suppliers have significant power over consumers such as Virgin. In terms of the threat of new entrants, it is reasoned that the easier it is for new competitors to enter the market, the more competitive the industry will be. Therefore, the barriers to entry that exist within the aviation industry play a major role in determining the competitive situation. As such, the aviation industry is difficult to penetrate successfully due to the existing loyalty of major brands, such as Virgin, Jetstar and Qantas.

Also, the high fixed costs and level of government regulation makes it difficult for new competitors to enter the market. Turbulence model It is possible to categorize turbulence into three sections; dynamism, complexity and unpredictability. In terms of the turbulence of the aviation industry, it ranges from moderate to surprising. The environment is highly dynamic as the competitive environment is constantly changing and evolving with new technologies and consumer expectations, with a high frequency of hese changes. The industry is moderately complex given the numerous factors that create the competitive market that is the aviation industry.

For example, Virgin operates within an industry with numerous competitors, rival products and an industry that is subject to peak and off seasons. The environment is largely predictable given its high linear/cyclical trends, that is, it is possible to predict the business activity of the firm around peak and off seasons and the reaction of economic events. .

Internal Analysis

Competitive Strengths

Virgin’s major competitive strength lies in its strong branding and brand recognition. Virgin is committed to ensuring an environmentally sustainable firm and is currently working in partnership with Boeing to create a lower carbon footprint with their aircraft. Virgin Australia has a dedication to improving customer service and innovation at the basis of its business plan, which ensures a competitive advantage in the market.

As of December 1, 2011, Virgin also has Alliances with Singapore Airlines and Continental Airlines, which is advantageous in that through collaboration of technologies, innovations and resources, Virgin can offer a superior product. “The partnership will see the airlines codeshare on international and domestic flights and co-ordinate flight schedules. The ACCC believes it will increase competition for international air passenger services and will be more attractive to corporate and government passengers with enhanced networking. (Finance News Network, 2011. ) Virgin also prides itself in having competitive pricing for business class.

Weaknesses

Virgin is not part of any major global alliances, has limited reach in terms of code sharing, for example, it is not part of the One World alliance. A strategic weakness of the firm also lies in the fact Virgin is somewhat limited in the services (destinations) it provides compared with other major airlines. [pic] 2. 3 Conclusions on competitive position

Currently Virgin Australia is at an advantageous competitive position, given its strong brand recognition, alliances with Singapore Airlines as well as its advances towards a more environmentally friendly product. At the basis of Virgin’s business plan is a strong commitment to the customer, which ensures the firm is able to adapt and cater for the changing needs of the market, thus enabling the firm to maintain a competitive position.

Strategic directions and Strategic Objectives

Vision

Virgin’s vision includes “to offer a customer driven service with an emphasis on value for money, quality, fun and innovation. (Virgin Australia, 2012).

Mission Virgin’s mission statement is “To grow a profitable airline, where people love to fly and where people love to work. ” (Virgin Australia, 2012).

Strategic Objectives

The strategic objectives of Virgin Australia is based on the mission statement in section 3. 2 of this report. The firm is largely consumer driven and has a strong focus on improving customer services for business and leisure travellers. In order to satisfy its customers, Virgin is dedicated to setting new standards for the rest of the industry to follow.

In terms of a plan for the future, Virgin Australia aim to offer the “best business product in the air. ” (Virgin Australia, 2012), while also growing the Virgin leisure business even further. In summary, Virgin’s strategic objective is to run an efficient but effective global airline.

Stakeholder Analysis

Strategic choice: key broad business level strategies 5 Ansoff’s product/market strategies [pic] The Ansoff product/market strategies (Johnson, Scholes & Whittington, 2008) that are being implemented by Virgin Australia are market penetration and product development.

These strategies respectively carry a low level of risk and a moderate level of risk for the organisation (Johnson et al, 2008). The evidence for market penetration strategy in Virgin Australia is shown in Virgin’s domestic network focus and aim to continue to expand its existing market share in the Australian domestic market (Borghetti & Narayan, 2012). The organisation also displays its commitment to market expansion in the strategy line adopted within the 2011 consolidation to Virgin Australia; Virgin aims to become Australia’s “airline of choice” (Borghetti & Narayan, 2012, p11; Schneider, K, 2012).

The evidence for product development strategy is in the focus on rebranding and modifying the image and product of Virgin Australia to appeal to the corporate travel market (Borghetti & Narayan, 2012). Virgin’s product development strategy includes distancing the organisation from its traditional low cost image and moving to an image that correlates to the high yield business market (Morton, 2011). This strategy includes the upgrading of aircraft interiors and airport lounges and facilities and introducing features such as valet check in and concierge services (Schneider, 2012). Miles and Snow’s adaptive strategies [pic] Out of the four adaptive strategies for market turbulence identified by Miles and Snow (Robbins, Bergman & Stagg, 1997), Virgin Australia uses both the prospector strategy and analyser strategy.

Turbulence in the domestic airline market, as explained in section 2. 1. 2 of this report, ranges from moderate to surprising. This environment requires a combination of customer/competitor based and flexible/creative strategic management (Viljoen & Dann, 2003). Virgin Australia achieves this through its pplication of the prospector strategy, shown in its product development strategy outlined in section 4. 1 of this report. This is combined with its use of the analyser strategy, shown in Virgin’s flexible organisational structure and measured approach to risk taking. 16 Porter’s competitive strategies [pic] Porter identifies five business level strategies used to establish a competitive position (Hanson, Ireland & Hoskisson, 2011), from these Virgin Australia historically used an integrated cost leadership and differentiation strategy in its low cost but varied product position in the market (Thomas, 2011).

The use of cost leadership strategies is often seen as the only dependable strategy in the airline industry (Thomas, 2011). However the game change strategic goals of Virgins 2011 consolidation into Virgin Australia (Borghetti & Narayan, 2012), have moved the organisation into two strategy categories; differentiation and focused differentiation. Virgin Australia has continued to develop its product for the broad Australian domestic market, with its differentiation strategy used to provide quality of service and a vibrant and revolutionary aviation product (Thomas, 2011).

Focused differentiation is being used by Virgin Australia to further its competitive position within the domestic business market. The product development of Virgins corporate travel product, outlined in section 4. 1 of this report, shows how the organisation has identified the special needs of the high yield corporate market and is catering its product to meet those needs. 21 International strategies International strategies include all strategies that develop business outside of the domestic market, specifically the three broad strategies are multi-domestic, global and transnational (Hanson et al, 2011).

Virgin Australia is using a global strategy as it develops resource sharing and co-ordination (Hanson et al, 2011) with international aviation organisations. The international strategy entry mode being used by Virgin is strategic alliances (Thomas, 2011). Alliances held by Virgin Australia include Etihad in Abu Dhabi, Delta Air Lines and Air New Zealand (Thomas, 2011). The rebranding of Virgin Australia to a corporate image has also allowed the organisation to pursue an alliance with Singapore Airlines which was previously incompatible with Virgin when the company operated on a low cost basis (Thomas, 2011).

The use of global alliances is particularly useful to airlines, including Virgin, as they are able to reduce costs through joint purchasing, achieve economies of scale and access wider markets (Hanson et al, 2011).

Conclusion on key business strategies being used by the organisation The rebranding of Virgin Australian in 2011 has invoked significant changes in the key broad business level and international strategies being used by the organisation.

Virgin is using market penetration and expansion to further its share of the Australian domestic market and product development to increase share in the corporate travel market. The organisation balances the use of the prospector and analyser strategy to respond to market turbulence and uses both differentiation and focused differentiation to create its competitive position.

Strategic Implementation: General Perspective

Evidence of mismatch between environmental turbulence and business strategy

Challenges such as high fuel prices and strong competition have led many airlines to a strategy of low cost targets to maintain market position (Thomas, 2011). This indicates a possibility for a mismatch between environmental turbulence and Virgin Australia’s business strategy to differentiate their product to cater to the corporate market and rebrand the Virgin image away from its traditional low cost image (Morton, 2011). However Virgin’s half yearly CEO report published in February 2012 shows hat the game change program is working with high yield corporate fares revenue share increasing from 11% in July 2010 to 25% in December 2011 (Borghetti & Narayan, 2012, p12). These figures are consolidated when it is considered that Virgin Australia made a 118% profit improvement from June 2011 to December 2011 when it listed a net profit of $51. 8 million (Schneider, 2012). Overall it can be concluded that despite the environmental turbulence position, the strategic focus of Virgin Australia’s management is not mismatched to the needs or demands of the industry.

Evidence of transformational strategic change There is evidence of transformational strategic change in Virgin Australia; this comes from the companies aim to rebrand its product away from a low cost airline, to a high quality airline service associated with corporate and leisure travel (Morton, 2011). The transformational change by Virgin Australia is aimed at removing some of its exposure to macroeconomic fluctuations in the leisure travel market (Morton, 2011), seen in the environmental turbulence analysis of this report.

The business market is considered to provide higher profitability margins and lower volatility (Morton, 2011), with the profit figures outlined in section 5. 1 of this report confirming this correlation. Virgin’s transformational change has removed it from the low cost airline domestic market and therefore altered the nature of its competition base. As a low cost airline Virgin competed against Tiger and Jetstar (Thomas, 2011), after its transformational change the airline now competes primarily against the services offered by Qantas (Morton, 2011).

Evidence of second curve activity There is evidence to suggest that Virgin Australia has already undergone a level of second curve activity when it consolidated in 2011 and announced its game plan change (Virgin Australia, 2012), including the focus on business markets and service quality already discussed in this report. With the changes in product development at Virgin Australia already representing a successful second curve activity (Borghetti & Narayan, 2012), there is no evidence to suggest additional second curve activity will be needed at any point in the near future.

Business level strategies on the BCG matrix [pic] Considering the position of Virgin Australia on the BCG portfolio matrix, the organisation can be placed in the ‘Star’ category. This is due to the high market growth rate Virgin is achieving and also large proportion of market share that the company holds. The organisation is placed close to the line for the ‘Question mark’ category as Qantas still holds the traditional market share of the corporate market (Morton, 2011).

Conclusion on overall implementation of business strategies

Overall it can be concluded from the evidence provided that Virgin Australia is effectively implementing its business level and international strategies. This is shown in the organisations successful transformational change, lack of strategic drift or any unrealised strategies and the avoidance of imposed strategies through product development. The organisation is well placed on the BCG matrix and positioned for strong future growth. 6. Key Strategic Implementation Issues Strategic implementation issue related to Virgins “game change programme”.

As can been seen using Mckinsey’s 7 forces model if one aspect of the business is not aligned with the other aspects of the business or the direction in which the business aims to move there will not be effective strategic implementation. Often different aspects of the business have differing objectives which they are trying to reach despite the business as a whole having overall objectives. As talked about it section 7. 3 of the report if the staff and strategy aspects are not mutually supportive the implementation of strategies may fail to be executed to the best of the businesses capabilities.

Customer Composition and Timing

The first strategic implementation issue is the composition of their customer base, and the ways in which that will affect the moving forward form the “No frills model” to a corporate service provider. Virgin’s decision to diversify into this market is based on two key elements;

The believed changing composition of their customer base. The market being broken into is “effectively controlled with one player, one player with a significantly higher cost base” (Former Qantas executive, Borghetti, 2010)

The competitor in the market is Qantas; dangers of moving into this market include losing customers to competition due to level of establishment (being a new carrier) of carrier or consumer demands. Research has lead Virgin to noticing the customer base moving forward and in turn demanding corporate service opposed LCC service; and the ability of Virgin to use their lower cost base as their competitive advantage will assist in interjecting into the aforementioned market.

Timing in the implementing is also important, implementing the changes too soon when customers not ready will result in losing customers to LCC’s such as Tiger and Jetstar, whereas implementing of second curve activity too late in the game, results in customers that are demanding that service moving to competitors ie. Qantas. Thus implementation issues arising from the customer base;

Composition of the consumer basis – Where they are at, where they will be in both the near and long term future in their demands and needs.

Timing of the implementation of second curve activity, vital in; ensuring minimal loss of customer base, minimal effects on profits of the business.

Inability to use strategic alliance tool successfully The second implementation issue is an inability to use a strategic alliance successfully. On the 1st December 2011, Virgin Australia announced the ACCCs approval of its alliance with Singapore airlines. (Borghetti, 2011). This alliance provided the opportunity for an expanded network of destinations, seamless connections, more convenient flight schedule and more opportunities to earn frequent flyer points. Virgin Australia, 2012).

Despite its potential this alliance has not been as successful as predicted, due to the lack of advertising and the customers being unaware of offers. Ensuring strong advertising would have created effective implementation. Promoting shared loyalty cards between Virgin Australia and Singapore Airlines is a solution which would increase awareness and encourage customer loyalty, Virgins current loyalty program, the Velocity Frequent Flyer is relatively unheard of.

Promoting this alliance would also assist Virgin Australia in their rebranding and high-class image strategy. While Virgin Australia has missed a great opportunity to expand its customer base through promoting the alliance with Singapore Airlines, it is not too late to fix these issues and ensure future benefits to both the airlines and their customers.

The two implementation issues that have been addressed can easily be altered by Virgin, and this will ultimately improve their strategic implementation.

However, if these issues remain unchanged they could have a significant impact on Virgin Australia’s strategic objectives and general position.

Strategic Evaluation

Overall Performance

The shift from Virgin Blue to Virgin Australia has been a positive move, positive profits have been returned in the last two years compared to the large losses that were experienced in previous years, it is observed that a contributing factor to the large 2009 losses can be correlated with the economic downturn of 2008 and thus the effects the downturn had on leisure travel both domestically and internationally.

The business is beginning second curve activities in the way of their “game change program” this strategic business decision has a large potential for the profits and opportunities for the Virgin Australia brand. The business is currently on the verge of making many changes and this appears to have beneficial outcomes for all aspects of business if implemented correctly. There are two main methods to measure the performance of a business; these are triple bottom line reporting and the balanced scorecard method.

Triple Bottom Line Reporting

Triple bottom line reporting is best defined as “a corporation’s ultimate success or health, can and should be measured not only by the traditional financial bottom line, but also by its social/ethical ad environmental performance” (Norman and MacDonald, 2004) Virgin released a statement in regards to triple line reporting in 2010 that shows their dedication to providing these reporting methods and thus make the businesses more transparent and socially responsible. As a responsible corporate citizen, we aim to maximise the social, environmental and economic benefits and minimise the potential impacts of our products and services on the planet and to the communities within which we operate. ” (Chief Executive Officer Virgin Australia, 2010).

The Balanced Scorecard

The balanced scorecard method outlined below shows the ways in which Virgin is able to measure their performance. In part this overlaps and expands on the triple bottom line reporting. Conclusion

By analysing Virgin Australia’s current strategic position it is evident that they are stable and heading in the right direction. After receiving losses in both 2008 and 2009, Virgin turned it around to achieve high profits in 2010 and 2011. This shows how beneficial Virgin’s decision to move away from the low-cost airline to the business class sector was. Although, management must still address the strategic implementation issues that have been identified. There are signs that Virgin is already amending these implementation issues, and fixing these will ultimately bring Virgin to the forefront of the aviation industry.

Virgin Australia’s future prospects are looking good; they have achieved increasing profits over the last two years, are successfully moving into the business class sector and are obtaining many loyal customers. The recommendations for CEO, John Borghetti, are to continue with the strategic objectives and implementation of the ‘game change program’ and to manage the implementation issues that have been identified and addressed.

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In an attempt to be more environmentally friendly, Virgin has introduced the 787 Dreamliner aircraft for international flights which improves fuel efficiency by utilising lighter materials and incorporating highly advanced aerodynamics. The new aircraft also uses fewer hazardous materials and creates fewer waste products. (Virgin Atlantic, 2007). “The demonstration, using a Boeing 747-400, will be the first worldwide by any commercial airline and aim to develop sustainable fuel sources suitable for commercial jet engines and the aviation industry.

The demonstration forms part of Virgin Atlantic’s vision for what the aviation industry can achieve by using clean-fuel technology to reduce carbon emissions and should encourage a faster pace of development for the industry. ” (Virgin Atlantic, 2007). Virgin’s dedication to the environment is evident in that the firm has volunteered to pay the carbon tax and has lobbied to be included in the scheme. (Probyn, A, 2011. ) In relation to the social element of the PESTEL analysis, the increased expectation and higher demand for a quality of service by consumers has meant Virgin have had to adjust to satisfy the consumer need.

As Virgin is a largely customer driven company, “one of the most pioneering and customer-focused airlines in the world” (McNerney. J, 2007), this has meant an increased focus on quality of service. Similarly, with an increased demand for higher safety measures Virgin has had to increase such measures to include higher levels of airport screening. Another important social factor for Virgin to consider is the fact the original base market is ageing and has significantly more buying power. The topic of advancing technology in today’s society is a significant factor affecting a firm.

In relation to the aviation industry, the most pressing issue relates to that of oil costs which affects the price of fuel. In an attempt to create both a more efficient, cheaper and environmentally friendly product, there is a focus on technological improvements to both aircraft and engine design. Another important technological factor to consider given the ability to create cheaper products is that of lower barriers for competitors to join the industry.