7BSP0419 – Adding Value through Marketing (Semester B 2010/2011)
VIRGIN GROUP: THE NEED FOR INNOVATION
MSc Marketing Prepared by:
Deniz Kurugollu
10283502
Sundeep Rai
05111441
Mansoor Akram
07156040
Vladimir Georgiev 10271719
10th April 2011
Table of Contents
Introduction........................................................................................................................................2 Changing customers and needs ...........................................................................................................2 Intensified Competition ......................................................................................................................4 Changing Business Environment .........................................................................................................5 Technological advances ......................................................................................................................8 Conclusion ........................................................................................................................................ 10 References........................................................................................................................................ 11
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Introduction After being first envisaged by Sir Richard Branson in 1970, Virgin is amongst some of the most well known brands in the world. The Virgin Group operates with more than 200 branded companies within many different business sectors ranging from, travel, financial services, and mobile telephony to transportation, media, music and fitness (Virgin, 2011). Virgin is classified among the 25 most innovative companies in 2010 (Bloomberg, 2011). The aim of this paper is to identify how Virgin is using the drivers of innovation in order to add value to its products/services. To this end, this paper employs the model by Goffin and Mitchell (2005) „The need for innovation’. The model suggests the four dimensions for companies to consider in terms of adding value to their offerings through innovation; Changing customers and needs, intensified competition, changing business environment, and technological advances. These dimensions will be examined in turn. Finally, a conclusion with recommendations will follow.
Changing customers and needs Innovation is significant only if it creates value for customers. At the end of the day, it is not about how innovative the company thinks it is, but customers are the ones who decide the worth of innovation (Sawhney et al, 2006). Shawney et al (2006) suggest that to add value along „customer‟ dimension, companies can find out new segments or discover unmet needs by the market. Virgin Mobile USA can be considered as an example in terms of discovering an „underserved‟ segment. The company entered the US cellular services market in 2002 by focusing on consumers under 30 years old. Considering this group‟s specific needs and wants such as style, image, convenience the company offered a value proposition which consists of simplified pricing, no contractual commitments, entertainment features, and stylish phone designs (Sawney et al, 2006). Moreover, Hippel (1988) points out that the users are an important source of innovation, and they can drive technological innovation as well. In this respect, Virgin Mobile included consumers, especially those between 12-25 age range who are the heavy users of mobile technology, in the programme called „Virgin Insiders‟ and provide input on the development
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of the latest mobile phones. Regarding the feedback, for instance, the company made photo uploads easier (Walker, 2004; Ziv, 2005). Another example related to serving for the right target audience and their needs can be observed in the case of Virgin Express. The airline mainly operates from Brussels to southern Europe destinations, which are frequently used by business travellers. Virgin Express operates as a low-cost, no-frills, short-haul airline. According to the IATA Corporate Air Travel Survey 1997, 70% of business travellers are „willing‟ to use no-frills airlines. The key features that this segment demands from the airlines are „punctuality, scheduling, competitive prices, and frequent flyer programs‟ (Gilbert et al, 2001). In this regard, Virgin Express has become an attractive choice for business travellers with relatively inexpensive offerings compare to other internal flights. However, the key competitive advantage here underlies the perceived quality of the Virgin brand. Although Virgin Express serves as a low-cost airline, the brand name secures the high quality image, while offering value for money. Regarding the increased competition and more variety in today‟s market environment, consumers are more willing to experience different choices to satisfy their needs and wants. They want to enjoy new offerings even if their needs are stable (Elliot and Percy, 2007). In this vein, Virgin Cola has recorded a significant success in the US carbonated drink market despite of its two major competitors; Coca Cola and Pepsi. Vignali (2001) points out that branding is more important for the younger generation, especially those aged between 15-19 years old. They are more concerned with the brand they drink than the taste. Virgin Cola targeted to this group through one of its main values, that is „being fun‟ (Dobni, 2006). The brand launched a bottle shaped like Pamela Anderson in the USA, which was well received by the target audience (Vignali, 2001). It can therefore be concluded that the given example shows how the brand matched consumers‟ needs and wants with the brand‟s value by using packaging components in order to add value to its offering. It is not only the increased choices that affect the consumer buying behaviour today, but the social and environmental concerns have become a sought-after characteristic which, in turn, influences consumers‟ relationship with a company in question. Research (Jobber, 2010: 202) shows that 70 per cent of consumers really care about corporate social responsibility in their buying decisions. Moreover, 20 per cent of consumers are ready to pay price premium for products that are socially and environmentally responsible. To this end, for instance, Virgin Atlantic is in partnership with charities related to both community and environmental issues 3
such as Shelterbox, an international disaster relief charity that delivers emergency shelters to people affected by disaster worldwide; Myclimate, a Swiss based charity who fund clean energy solutions, especially in developing countries
(Virgin Atlantic, 2011a; 2011b). As a
result, the company adds value to its offerings through adding value to its social and physical environment.
Intensified Competition In recent times it has become ever more important for firms to conduct research in regards to their competitive environment, as in a contemporary economy, business organizations need to act in a very fast in a changing and unpredictable environment, further in order to sustain an competitive advantage firms must add value by the creation of new knowledge which can be implemented then in terms of products and services (Kstutis & Krišinas, 2008). Virgin is an example of a firm, which operates throughout multiple industries, as a result they face competition across market sectors simultaneously, and this therefore requires them to have a clear focus upon strategic directions of firm as well as its own competencies. Strength of the Virgin Group has been the way it is viewed as a brand, its brand name has allowed it to diversify and develop autonomous enterprises under a single unified brand. Vignali (2001) explains the importance of communication within a centralized company such as Virgin. However he asserts that the unique culture implemented by Sir Richard Branson has been important in terms of the way in which employees are motivated, furthermore how the firm addresses the external environment, such a with competition, “More than any element, fun is the secret of Virgin‟s success” (Branson, 1998). Vignali (2001) goes on to observe that key to the success of Virgin has been its brand name. It is also suggested that the potency of the Virgin brand stems from consumers not associating the brand with product characteristics but rather with emotional associations, giving Virgin a powerful competence upon which they can gain leverage, which some of its competitors may lack. However, even with the strength of the Virgin brand, intensified competition can affect new products very much so, further reinforcing the need for innovation. An example of this is Virgin Cola. Due to increased intensity of competition within the soft drink market in the U.K and U.S; it had become more increasingly important for firms to focus upon promotion, image and packaging rather than just the product itself, to gain a competitive advantage. Additionally wider varieties and increased competition has meant that consumer are were willing to experiment with other 4
carbonated drinks and flavours. As a result of this increased competition firms such as Pepsi, and Coca Cola used aggressive promotion campaigns in order to maintain market share, this example helps explain that in the competitive world of global soft drinks, brand alone may not be enough to sustain competitive advantage, further there is a need for innovation, not just in terms of product and brand image but quality and competitive pricing. That put increasing pressure upon firms to be innovative (Vignali, 2001:143). Vignali & Schmeling (1998) explain how variances between countries also have an effect upon the way Virginâ€&#x;s brand is perceived. For example the Virgin brand is stronger and more recognized in the U.K than in the U.S (Turcsik, 1994). This illustrates the importance for a company that operates globally to consider awareness of their brand and strategy in different geographical markets. This therefore adds a complex dimension to the notion of intensifying competition in global markets. The ever-changing environment makes it imperative for firms to be proactive in the face of competition (Kroes, 2005). Changes in consumer tastes and technology makes it essential to innovate new ways in which to offer customers an improved value proposition. Virgins brand constitutes arguably its biggest strengths (Vignali, 2001). However the dynamics of the competitive environment makes it increasingly important for companies such as Virgin to innovate. Hollis (2002) further elaborates on the importance of innovation in terms of being first, which offers companies a strong competitive advantage in terms of building awareness. Ultimately escalating competition drives the need for Virgin to be inventive, in order to distinguish themselves from competition, particularly within saturated markets. Virgin cannot solely rely upon its Brand image, within global markets, and must increase focus on elements of their marketing mix to offer better value for customers.
Changing Business Environment Dixon & O'Donohue (2006) manifest that the analysis of an organisation's strategic management factors such as consumer knowledge, comprehension of competition, revolutionised use of technology and challenges created by instable environmental fluctuations create opportunities and moreover strengthens an organisation's competitive advantage when refining a core yet unique purpose of existence within a market. In regards to adding value to Virgin's globalising products/services catered to wide audiences in various business environments; a lot of considerations have to be taken to bring about the competitive 5
advantage over other rivalry products/services. This relates to the thorough environmental scanning of Virgin's operating environment through the use of PESTLE analysis; to better understand external factors. For instance when looking at Political issues each country is defined individually different hence a different set of political aspects for each country Virgin has expanded in. However the question at hand is how does Virgin add value to its brand products/services in regards to Political, Economical, Social, Technological, Legal and Environmental differences? If we investigate UK and its oil shortage as a resource issue as an example; it has been reported to threaten the travel and consumer goods industry (Roberts, 2010). Furthermore Roberts (2010) indicates that new travel policies will be considered by the new elected party; directly impacting Virgin's CSR in regards to aviation and train travel services. Richard Bronson's founded Virgin and branched out to offer its consumers products/services with added values through innovation and uniqueness in correspondence to the ever so changing business operating environments (Associated Press, 2008). Associated Press (2008) further reports that Virgin aviations was the first to conduct commercial flights using Bio-fuel and Richard Bronson is reported to investing billions to conduct further experiments to battle oil shortage and global warming issues by creating alternative fuels and minimising CO2 emissions. Furthermore Virgin trains were the first to use Bio-Diesel (an alternative to diesel made from crops) in June 2007 to reduce CO2 emissions by 12% and furthermore have predicted to save 3,500 tonnes of CO2 emissions (Collins, 2009). Collins (2009) indicates that Virgin Train wastage is mainly from onboard magazines and newspapers, which also harms the air and in response they have made all magazines and newspaper 100% recyclable. The use of alternative fuels will not only benefit the business environment but also benefit Virgin as they are cheaper and will save costs in the future and Virgin will be given the opportunity to better serve its consumers at reduced price labels (Collins, 2009). Innovation has been Virgin's priority and reason of existence and it can be additionally witnessed through Richard Bronson's Virgin Earth challenge where anyone who can create technology to capture and convert climate-changing gases will be awarded $25million (Chen, 2007). This challenge adds value to Virgin's brand through their interest in helping and improving the environment it operates in and as well as the environmental issues consumers suffer from. De Wit & Meyer (2005) emphasis on the synergic strategy "Inside-out 6
approach"; where an organisation's perception is revitalised through products/services to best meet the ever so changing aspects of the business environment, enhancing competitive advantage. This strategy starts internally where first the organisations key perception is verified (Virgin: innovation) within a particular market (travel) and then mixed and matched with the environmental fluctuations (Bio-fuels vs. oil shortage policies) faced within a market. These are only few steps taken by Virgin to add value by understanding their operating environment; these not only create competitive advantage but also target the three consumer appeal scenarios, which is illustrated by Figure 1.
Figure 1: Consumer Appeals
Source: Papyr, 1995
These are Rational (i.e. cheaper Virgin services by cutting fuel costs), Emotional (i.e. luxury virgin trains) and Ethical (i.e. environmentally friendly emissions) decisions to preference Virgin aviation and trains over rivals. Orwig (2004) indicates that these approaches not only create a Unique Selling Point (USP) but also an Emotional Selling Point (ESP) which is collaboratively achieved through the brand preference created by three mentioned appeals when making a decision upon purchase.
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Technological advances According to (Johns & Saks, 2001), there are seven dimensions of culture, and Virgin has a heavy emphasis on three in particular: aggressiveness, innovation and risk-taking, and people orientation. However, a major facet contributing to the innovation and risk-taking can be attributed to the technological advancements perceived by the company. Jobber (2010) speculates about the importance for marketing driven companies not only to observe technological developments but also to pioneer technological breakthroughs, furthermore explaining the power of technological advancements to transform markets and shift competitive advantage in favour of those companies. Porter (1985) suggests that technology development is one of the supporting value-creating activities to customer value chain. In order to shift customers from existing standards, the new technology must generate more value that a combination of the derived from the existing offerings (Mohr et al.,2008). An example of such a shift could be examined in the marketing offerings of Virgin Atlantic airline. Kim C. and Maubourgne R. (1997) describe the introduction of innovative technology (i.e. including in flight music, games, and movies) on board of the Virgin Atlantic as taking the company well beyond airlines‟ traditional offerings and applying the logic of “value innovation”. Thus, technological advancement coupled with another innovation of the service platform of Virgin Atlantic has pushed the company logic and culture to translate into company‟s value creation strategy. A report by BCG (2009) shows that Virgin sharpened its sustainable competitive advantage by employing adaptive advantage, attributing the company‟s quick entry and exit into new businesses and diverse industries. However, Virgin‟s perhaps most expensive brand extension program (Keller, 2008) might be examined to bring not just adaptive advantage but also a technological know-how. One example would be the use of alternative bio-fuel to power Virgin airline fleet. Branson commented that: “although this test didn't use a viable fuel, it's a landmark proof-of-concept” (Nilay, 2008). The statement, however, refers to an approach that Virgin has towards pursuing and exploiting new, cutting edge technologies and innovations. However, what has been a „proof-of-concept‟ couple of year ago, it is recently reported as a technology embedded into company‟s latest spaceships. According to the Virgin Galactic website, hybrid rocket motor - benign and non-toxic fuels would power the shuttle. Therefore,
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it is evident that a transfer of technological know-how would benefit another highly innovative project. Another example of an application of technological advancements by Virgin is the integration of WiFi internet into Virgin Trains (Jobber, 2010). Once more, a service improvement has been facilitated by integration of a technology. Although Virgin did not have own technology to employ in this the service, Jobber (2010) suggest that decision was driven by the notion of adding value to its customers. However, this technology addition could also be examined as part of more deliberate model that Virgin encompasses known as technology mapping. Mohr et al.(2008) refers to four main steps in technology mapping as described by Capon and Glazer which develop and manage technology resources. The first step of technology identification is used by Virgin once by recognising the value of the ideas they have and second (Jobber, 2010) suggest that it is perhaps a natural extension of their Virgin Mobile services already offering mobile internet. The second step of technology mapping refers to taking the decision about technology addition and on how to do it (Mohr et al, 2008). The decision to proceed with the adding the WiFi internet together with the internal environmental scanning, however, has led Virgin to partner with T-mobile as they consider their
own
technological
canâ€&#x;t
know-how
deliver
the
perceived
results
(Jobber,2010).Therefore, acquiring partnerâ€&#x;s technological know-how, follows the third step of technology mapping, providing Virgin with the opportunity to directly commercialise on it. Mohr et al.(,2008) agues on the marketing risk related to the commercialization of the technology. However, Jobber (2010) suggest that superior commercialization of technology was and will be key success factor in many industries. Jobber (2010) also argues on the need to blend marketing and technology in order to market technological innovations. Therefore, Virgin might use marketing to elaborate on one of the elements of diffusion of innovation, indeed its communication channels (Rodgers, 1995) and ultimately create value through this communication process.
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Conclusion Considering the slow growth, commodization and competitive environment today, many companies view innovation as crucial to corporate success. In the course of the report, all the examined examples regarding the Virgin Group relate to the four dimensions of the need of innovation. It was discovered that the Virgin strategic marketing focus use all of those dimensions actively to innovate and perceive competitive advantage. A driving factors contributing to the changing consumer needs has been acknowledged by Virgin and the company has used them to include consumers in the production level in order to correspond to their needs and wants in a value generation approach. In addition, deeply rooted into company culture, innovation has being strongly driven by Virgin integration of technologies which were also mixed in the value proposition of their service and product offerings. Furthermore it is also apparent that intensification of competition plays an imperative role within driving innovation. Market saturation has lead Virgin to distinguish themselves from competition through innovation. It appears to be the case that innovation refers the creation of substantial new value for customers and the firm by creatively changing one or more dimensions of the business system. In this regard, unlike the conventional belief, Virgin has broadly attributed the need of innovation not only as synonymous with new product development or traditional research and development, but by employing holistic view of the value innovation.
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