virgin blue asignment

1 | P a g e V I R G I N B L U E A I R L I N E S

Table of Contents1.0 Introduction...............................................................................................................................3

1.1 Company Overview:.....................................................................................................................3

1.2 Purpose of Report........................................................................................................................3

1.3 Tools of Analysis:.........................................................................................................................4

2.0 Internal analysis of Virgin blue:.......................................................................................................4

2.1 Identification of core competencies of Virgin blue......................................................................4

3.0 External Analysis of Virgin blue........................................................................................................6

3.1 Low cost strategy of Virgin Blue group:.......................................................................................8

3.2 Differentiation Strategy of Virgin blue:......................................................................................10

4.0 Environmental Analysis.................................................................................................................10

4.1 Competitive Environment of Virgin Blue:..................................................................................10

4.2 Competitive Rivalry....................................................................................................................10

4.3 Barriers to Entry and Exit:..........................................................................................................11

4.4 Supplier Power:.........................................................................................................................11

4.5 Buyer Power:.............................................................................................................................11

4.5 Threat of Substitutes:................................................................................................................11

5.0 Critical Assessment Effectiveness of above chosen Strategies:.....................................................12

6.0 OLI Paradigm Analysis of Virgin blue.............................................................................................14

6.1 Ownership Advantage or FSA (Firm specific advantage):..........................................................14

6.2 Location Advantage:..................................................................................................................14

6.3 Internationalization Advantage (IA):..........................................................................................15

7.0 Summary of strategic situation:.....................................................................................................15

7.1 Internal and external factors:....................................................................................................15

7.2 Gap Analysis:..............................................................................................................................16

AHMED NAYEEMUDDIN ID: 08236986

MBA FULL TIME GROUP FEB 2009


7.3 Strategic Options for Virgin blue:...............................................................................................16

8.0 Recommendations to adopt above strategic options:...................................................................16

9. Conclusion:......................................................................................................................................18

References:..........................................................................................................................................19




1.0 Introduction

1.1 Company Overview:Virgin blue is Strategic business unit and subsidiary of one of the UK’s

largest private company (Virgin Group) which was founded by Sir Richard

Branson. This group has grown very triumphant private businesses in

various sectors ranging from Music, telecommunications, travel. Leisure,

transportation, financial services, holidays, retailing and publishing. It

established almost around 200 branded firms around the world with the

workforce of 50,000 people among 29 countries. The revenues generating

around the world by virgin group is around £10 billion.

(www.virgin.com)

This report basically looking at Virgin blue group only comprises of

various airlines Virgin blue, Polynesian blue, Pacific blue, V Australia

which has got headquartered in Queensland Australia. This group holds

4100 of workforce and acquires 32% of domestic airline market share.

It operates around 53 Boeing aircrafts in 22 Australian cities and this

group individually earns total revenue of approximately $2,169.1

million 2007 and $215.8 million of net profits.

(www.virginblue.com.au)

1.2 Purpose of Report

The main purpose of this report is to identify the key internal and external

factors that have influenced the Virgin blue group and strategies

employed with in the Australian airline industry. Once these

characteristics are determined this report will assessed the chosen

strategies it will conclude with at least two or three strategic options AHMED NAYEEMUDDIN ID: 08236986



available for Virgin Blue Group with few strategic recommendations based

on the analysis performed.

1.3 Tools of Analysis:Various analytical tools are employed to within this report. In order to

carry out the internal strategic analysis of virgin blue this report will firstly

identify the core competencies of Virgin Blue and it will employ generic

strategy frame work developed by Prof Michael Porter. After performing

the internal analysis, this report will analyze the external industrial

analysis of virgin blue by employing Porters five forces model.

2.0 Internal analysis of Virgin blue: Value chain frame work is a handy tool employ to analyze the

internal activities in which company can practice its distinct core

competencies at its very heart, which can be in the shape of

differentiation strategy or low cost strategy (Mac Millan et al, 2003)

2.1 Identification of core competencies of Virgin blueCore competences according to Hamel and Prahalad (1994) are bunch

of distinct skills and technologies which allows firm to offer its customer

certain benefits. Core competences are not product specific as they

contribute towards variety of products and services competitiveness.

These distinct skills are not considered as core competences unless they

meet 3 tests like customer value, extendibility and competitor

differentiation. These all are considered as unique techniques on which

firms are good at and this can’t be imitate easily to affect competition (

Prahalad and Hamel, 1990).

Core competencies of Virgin group of companies are most obvious and

these competencies are applied to all SBU’s (Strategic Business Units)

around the world these are mentioned below:AHMED NAYEEMUDDIN ID: 08236986



1. Strong brand name and reputation: Almost 96% of UK customer

considered virgin as their most admired brand. It holds about 200

different branded companies under one unified Virgin brand which

create barriers for competitors imitate its operational process and

corporate structure. Even (Prahalad and Hamel, 1990; Porter,

1985) states that sustainable competitive advantage and unique

techniques builds barriers which makes imitation complex.

Creative promotions with full ‘FUN’ style: Richard Branson

the founder of virgin group is considered as synonym of virgin

brand and its reputation. Not only had that he becomes the most

significant means of promotion and advertising which makes it

distinct. He creates challenges for competitors in funny and

entertaining way which builds positive emotions for customers

with the help of events. At the time of launching virgin mobile in

Australia he flew into the conference hanging from virgin

helicopter promising the locals to secure from costly mobile

operators. Branson’s charisma and entrepreneurial talent is

distinct asset that other competitors can’t imitate.


Virgin People (Employees): Branson and his workforce (Virgin

people) make up the Virgin Corporation. Every SBU has been

given empowerment which helps them to instantly react to

market changes without concerning top management and it

allows them to be proactive. Branson says we are part of family

rather being hierarchy which shares ideas, solve problems, share

values, interests and fulfil duties with virgin twist.





Simple Corporate structure: The Virgin’s success is standing

on corporate parenting strategy that every new SBU posses

Virgin’s brand name, style of management, values and access to

resources. Virgin blues corporate strategy is standing on its

slogan ‘keep the air fair’. Competitive sustainability is

depending on how well they are operate to maintain Virgin

culture and decentralized under integrated brand. The main

question is whether this brand name allied with Richard Branson

remains same value for consumers even after he left. In order to

attain competitive advantage Virgin must assimilate its Core

Competencies in the internal processes and Virgin Corporate

culture. (www.virginblue.com.au)

3.0 External Analysis of Virgin blue According to (Porters, 1980) there are few basic options which are

faced by firms are fundamentally the scope of the market that the

company would serve and compete in. Competitive strategy focuses on

company’s tactics to attain the most beneficial position in its industry

(Pearson, 1999).

The company’s profit is basically the difference between its costs and

revenues. Hence profits can be boost either by high premium prices or

reducing the costs depending upon competition. Even (Lynch, 2003)

agrees that companies can attain competitive advantage fundamentally

through products and services differentiation or by offering lower cost

than those of competitors. This can be achieved by targeting their

products to broad target customers so that it can occupy most of the

market place or by only focusing on narrow targets inside markets.

(Porter, 1985) have generated three generic strategies which can be

employed to attain competitive advantage which are mentioned as follows




1. Cost leadership strategy

2. Differentiation strategy

3. segmentation strategy

This framework is comprises of three generic strategies let’s see which

one is applies to Virgin blue’s strategies which are outlined below.

Virgin Blue’s main idea is to recognize itself as one of the most

leading Australian lowest fare airlines which offers low fare services to

customers by continuously developing its services and enhance low

cost offerings. (www.virginblue.com.au)

It has uses escalating techniques initiated by some of the well

known airlines such as southwest airlines and Ryan air. This has

eliminates costs by offering its customers inclusive in-flight meals and

printed tickets in support to sell food on board and providing easy

booking through telephone and internet. (www.virginblue.com.au)

It has reduces costs by limiting its service to number of airports by

operating only one flight (Boeing 737). It is offering less rate of pay than

its major competitor Qantas. The main and critical aspects of virgin blue

are cost containment and efficient operating system of its modus

operandi. Below are the some key components which contribute to make

virgin blue strategy feasible.

3.1 Low cost strategy of Virgin Blue group: Low fares: To boost the level of demand this low fare approach

is used. The virgin blue offers their tickets to business travelers

who never travel other than that and target them by providing




them extra modes of transports such as car, train and bus. Low

fares are all also offered to one way travelers which are bit unlike

for traditional full service airline. High fares are set on the basis

of demand for specific flights and date of departure. 75% of

tickets are offered at low available fares once it is filled up they

will increase price per seat. (www.virginblue.com.au)

Frequent Point to point service: By using point to point

service on short haul routes it enables virgin blue to get away

with giving through service for connecting flight passengers. This

includes transit passenger assist cost and luggage transfers etc

and this is considered as one of the main differences between

traditional carriers and virgin blue. (www.virginblue.com.au)

Low operating costs: Virgins higher management believe its

operating costs are low among the most leading lowest

passenger airline. Four main expenses are outlined below which

virgin blue can control and trim down.


Aircraft equipment costs: Virgin blue uses single type of aircraft

(Boeing 737) to control its acquisition costs. This is mainly to

minimize associated costs like personal training, maintenance

and spare parts to meet the everyday expenditure of flexible

crew scheduling and equipments. (www.virginblue.com.au)

Personnel expenses: In order to control its labor cost they

continuously improve the productivity of already strong




productive e labor. Employees’ remuneration accentuates output

based incentives such as commissions for high on board sales

target for flight attendants; regions flown by pilots, number of

hours based payments and cabin crew on industry standard

limits of hours. (www.virginblue.com.au)

Customer service costs: virgin blue have sub contracted certain

operations under competitive terms to third parties on certain

airports like air craft handling, tickets and other services where

they found it is cost efficient. Internet bookings promotions have

removed commission of travel agents and it has brought drastic

growth in e-bookings which have lead to 90% of reservations day

to day basis. (www.virginblue.com.au)

Airport access fees : By delivering large volume of passengers on

certain airports has enabled virgin blue to have economical

negotiations for accessing their facilities.


D. Commitment to safety and quality maintenance: Virgin’s

management is committed in employing and training of their pilots,

flight attendants and maintenance personnel. They all maintain the

aircrafts in accordance with top international airline industry standards.

Even though it operates its fleet in cost effective manner, without even

extending low cost strategy on the areas of safety, quality assurance

and maintenance. (Miller, 1992)

3.2 Differentiation Strategy of Virgin blue: Low cost air lines should

contemplate on differentiating their products and services by offering

customers frill containing products which must be highly rated by

customers in terms of value for cash. Virgin blue was the first one to bring




in Live2Air in its flight a multi-channel satellite TV. The low cost carrier’s

strategies are twofold to obtain the legacy carriers and catch the attention

of higher-yield passengers and put in points of difference from other

(LCCs). (Doganis, 2001)

From the above analysis it is clear that the main success factors

of Virgin blue’s strategy are low fares, point to point service,

homogenous aircraft fleet, simple process of business and lean and

mean work force and differentiation of products.

4.0 Environmental Analysis

4.1 Competitive Environment of Virgin Blue:4.2 Competitive Rivalry: Virgin blue’s level of strength in competitive

forces which is very high since the possibilities at stake is substantial in

terms of capital expenditures. The nature of this industry demands large

amount of capital to spend to just cover operating expenses, in addition

maintenance, expansion of services and regulatory approval requires the

same. “The firm orders are valued at $420 million and the

potential value is $840 million if covered all options are

converted” (Mc.Clearn, 2005, p.24). These types of huge figures are

attached to every service brought to market; competitive forces of this

industry are extreme.

4.3 Barriers to Entry and Exit: Due to heavy costs and high risks allied with

airline industry the entry of competitors is not a major threat. However,

high value of services has high impact on the level of rivalry. Heavy

financial requirement of this airline industry both entry and exit no doubt

that competitive alliances and consolidations are standard rather than

discharge.

4.4 Supplier Power: Virgin blue being an Australia’s largest regional airline

has some leverage on its suppliers like, meal caterer, jet fuel refiners and




supply related agencies. This enables virgin blue to demand lowest prices

for contracts. Hence it shows that it has power over its suppliers.

4.5 Buyer Power: Traditionally customers were not given many choices in

airline industry in fares to destinations on which there are limited airlines

that operates on any given route. But by introducing low fare air lines

virgin blue have changed this dynamic by offering a number of choices for

any given destination, of different fares provided by other airlines

(Shaw,2004).

4.5 Threat of Substitutes: Threat of substitutes is a greatest threat to

virgin blue because usually in this industry it comes in the shape of other

low cost airlines. This because of their extremely thin margins and low

costs of operating undercuts the other traditional airlines in every feasible

style (Grescoe, 2004, P.12). An airline mainly depends on cutting down

operating costs to maximize their profits. Any kind of inconsistency in this

cost structure no doubt create losses that’s why new airlines have high

power over traditional carriers which made them to establish low fare

airlines.

5.0 Critical Assessment Effectiveness of above chosen Strategies:From the above outlined internal strategic analysis based on porters

generic strategies it is confirmed that Virgin blue have employed both low

cost strategy and differentiation strategy.

Porter (1980) says if a firm fails to make choice between differentiation

and cost leadership basically means that it is stuck in the middle and it

will lead to poor financial performance. However, Miller (1992) and Kay

(1992) have referred to real examples of Toyota and Benetton the two

successful firms who have implemented more than one generic strategy.




Both firms use low cost and differentiation concurrently and were

successful.

The current strategy of virgin blue stays unaffected by its unique market

strategy when it has joined Australian market. It’s mentioned earlier its

corporate strategy stands on its slogan “keep the air fair”, and this is

attain by LCCs (low cost carriers) business model. However it is evolving

this LCCs model into transformational strategy of business based on

network carrier model of business where it is striving to be a new world

carrier, which is nothing but airline which get utmost yield by giving first

class service. The consent is that company’s strategy depends on low

cost generic strategy but use service delivery as major differentiator in

market. (www.virginblue.com.au)

In early 1980s there was extensive use of generic strategies of porter

which were considered as essential for strategy and the ideas what he

recommended. But after some time it was clear that in actuality it has

some shades of grey in difference between cost and differentiation as

compare to white and black which is expected in theory. It becomes very

complicated for companies to over look cost completely doesn’t matter

how distinct their product offering is. In the same way firms will not

expose that their product is basically the same as of others (MacMillan

et al, 2000)

If you observe one of the Virgin blue’s strength is low cost operations but

on the other hand it has got Achilles' heel like service resources are less

by low cost. (O’Connell and Williams, 2005)

Low cost positioning means choosing to perform a system of activities

differently from that of traditional rivals and providing a coherent set of

key activities that reinforce each other to achieve such position in a

sustainable manner (Porter, 1996). However there is a risk involve in

just following the cost leadership strategy which focuses only on dipping




costs, yet sometime at the cost of other important factors, it may become

very overruling that firm loses vision of why it has depend so much on

this strategy. (O’Connell and Williams, 2005)

As One of Virgin blue’s competitors Ryan air, Jet star has also adopted the

same strategy by prioritising its strategic position in market on short term

profit maximisation. It has employed low cost strategy to cut prices even

more to strengthen the financial pain on their competitors (Albers et al,

2010).

In contrast with cost leadership strategy, there is a practical fact to

sustain the differentiation strategy that one of the findings on study of 64

American companies reveals that there is superior performance for firms

who follows differentiation strategy (Hall, 1980). Porter (1996) also

states that firms, if establish a difference that it can shield then it can

outperform its competitors.

6.0 OLI Paradigm Analysis of Virgin blueDunning (1981) has developed an OLI Paradigm framework used to

analyze the decision to engage in FDI (Foreign direct Investment) which is

indentified on the basis of 3 types of advantages to firm provided by FDI

in comparison to exports which are out lined below:

6.1 Ownership Advantage or FSA (Firm specific advantage): It is usually the tangible and intangible assets that which forms

competitive advantage benefited to firm like for airline it can be

associated to their reputation, capital, structure of ownership, economies

of size and leadership. In general LFA (low fare airlines) enjoys a good

reputation (Lawton, 2002). Virgin blue as a part of virgin group does holds

this advantage in the shape of Richard Branson. It is one of the major

Australian low cost airlines which only use low maintenance fleet (Boeing

737-700). Virgin blue has advantage to become successful multinational




LFA as it possess some unique benefits from its competitor which can

vanquish the operating cost in abroad markets (Albers et al, 2010).

6.2 Location Advantage: Benefits of location (CSA-Country Specific

Advantage) will influence the mode of airline entering the abroad markets.

This study ropes that the choice of location is mostly determined by

market prospective and level of rivalry/competition in that market LFA

mainly internationalize such markets which offers substantial intensified

growth opportunities. This is type of situation for Virgin Blue can obtain

advantage at carrier level which can be set up in Asia-pacific environment

where competition is limited because half of the LFA doesn’t provide

international services. Mostly LFA are based in densely populated area

which offers huge potential passenger base as well and where rivalry is

limited. The low fare hub of Asia the Singapore with outstanding

geographic areas, where quite a lot of LFA’s holds home bases and

serving several carriers. (Albers et al, 2010).

6.3 Internationalization Advantage (IA): One of the significant advantages

of internationalization for LFA is quality control and ability to avoid

uncertainties of services to customers. An actual fact linked with FSA of

reputation and brand name in which Virgin blue is considered as an

effective service delivery LFA. ). Flat governance LFA can easily influence

this sort of flexibility and speed-associated internalization advantages as

far as possible. (Gillen and Morrison, 2003)

There are four modes of international entry like Code contractual

alliances, Own bases, National subsidiaries and FDI (foreign direct

investment). Code contractual alliance is risk loaded and less capital

intensive strategy to expand and enables LFA to knock into the markets

yet intact by their first moving rivals. Establishment of own bases strategy

is used by pioneers like Ryan air and easy jet the rivals of Virgin blue.

(Gillen and Morrison, 2003)




7.0 Summary of strategic situation:

7.1 Internal and external factors:The result of the virgin blue’s strategic analysis exposes that it is a highly

innovative and leading cost effective airline of Australia. It is prepared to

embrace latest strategies and business techniques so that they can

enhance not only their cost saving strategies but also end in intangible

advantages like good will and reputation. Externally Virgin blue is just

working in local market of Australia which is demanding high class service

locally as well as internationally from the airline rivals and to drive change

in this kind of market just low fares are not enough to cope with high

customer traffic.

7.2 Gap Analysis:According to gap analysis of Virgin blue it is said that it fall short as

renowned leader in every airline service class. This sort of bad

appearance in best airline Awards, it should focus on its ranking in top 5

airlines service classes: best low fare airline, best airline alliance and best

cabin crew (www.worldairlineawards.com).

7.3 Strategic Options for Virgin blue:Virgin blue has so many strategic options obtainable such as

advancement of its aircrafts, workout on its cost effective strategies even

more, and expansion of its services (Internationalization) which is drawn

upon the analysis of OLI paradigm to become international low fare

carrier(Albers et al, 2010).. It should also improve its customer visibility

on internet by extending it and must improve customer fulfilment ratings .

In order to improve its overall financial performance virgin blue may

consider the initial public offering of its share IPO which will enable it to

have bigger access capital and strong market drive.AHMED NAYEEMUDDIN ID: 08236986



8.0 Recommendations to adopt above strategic options:

In order to upgrade its aircrafts it has to buy advance models of

Boeing which are more beneficial in operating international low fare

airlines.

It has to work out on its cost effective strategies bit more as its

major competitors Ryan air, Qantas and South West airlines are also

cutting down there operating costs by marking their margins down

to attract customers.

To improve its customer satisfaction rate and become among the

top 5 best airlines it has to make their service more attractive by

offering low prices for best in class service than their competitors. It

can also develop personalized media centre for all customers which

comprises of following (Ragins and Greco, 2004):

a. Updating interactive content consists of industry news, full flight

information, travelling information and adding search related

browsers.

b. For purchasing and selling of tickets including other amenities

like travel necessities, hotels and rental transports they need to

provide Commerce centre.

c. Online survey materials java based must be uploaded for

customers to fill in figure out satisfaction levels of customer and

comments on Customer relationship management of Virgin

Blue(Kotler et al, 2000).

In order to expand its services at international level it should

analyze the low competitive markets such as Singapore a low fare

hub of Asia which is outlined above in OLI analysis. There are




favorable options available for Virgin blue as per the above analysis

like Firm specific advantage is good in the shape of Richard

Branson’s image around the world.

Virgin blue can adopt any of the options available to it from the

above OLI analysis to internationalize itself such as code contractual

agreements which are less capital intensive, or by building their own

base, or by having national subsidiary through FDI by holding stake

but can still operate under same brand name.

9. Conclusion:Conclusion of this report is drawn upon the internal and external analysis

of Virgin Blue airlines. Virgin blue is one of the best low fare airlines within

Australia which holds about 32% of its market share which is a sign of

successful airline firms. However due to heavy competition in the market

it needs to observe its strategic position frequently to figure out always

available strategic options in order to keep up with competitive market .

For the firms competing in low-margin, high cost environment, every

strategy that generates market differentiation along with functional tools

of CRM which are part of its core business strategies(Kotler et al, 2000),

is greatly smart way of attracting customers. Above strategic option of

internationalisation reveals that market is demanding international low

fare airlines with best in class services. To become successful low fare

airlines in future Virgin blue needs to find appropriate environment to

make their strategic options work effectively. In order to use available

strategic options this market demands heavy capital so it needs to

strengthen its financial position which can be done by IPO. There are

some recommendations which may be help full in utilising the strategic

options available to it.




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Web Sources:

www.virginblue.com.au

www.worldairlineawards.com

www.virgin.com



http://www.worldairlineawards.com/

http://www.virginblue.com.au/

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