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Branson's Virgin: the Coming of Age of a Counter-Cultural Enterprise

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Branson's Virgin: the Coming of Age of a Counter-Cultural Enterprise Branson’s Virgin: The Coming of Age of a Counter-Cultural Enterprise 03/95-2122 This case was prepared by Robert Dick, Research Associate, under the supervision of Manfred F.R. Kets de Vries, Raoul de Vitry d’Avaucourt Professor of Human Resource Management at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1995 INSEAD, Fontainebleau, France. Financial support from the INSEAD Alumni Fund European Case Programme is gratefully acknowledged. INSEAD 1 2122 The year 1994 was one of mixed success for Richard Branson. His $100 million deal with Delta, the US airline, to block purchase transatlantic seats on his airline, Virgin Atlantic, had been approved by the UK authorities but was later rejected by the US government; a submission to convert his rock radio station from the AM frequency to the more popular FM channel was not accepted. His bid to run the UK’s new national lottery was rejected. However, approval was granted by the Office of Fair Trading for Virgin to acquire the Our Price chain to create the largest music retailer in the UK. In addition, a number of new projects were under development. Branson’s opening salvo for 1995 was the announcement of a new 50-50 venture with Norwich Union to set up Virgin Direct Financial Services, an attempt to revolutionize financial services by selling cut-price insurance, personal equity plans, and pensions directly by phone, cutting out the middlemen. The latter venture was obviously influenced by the success of First Direct, an English company which pioneered telephone banking, and Direct Line, which now controls an increasing share of the market in automobile and household insurance. Branson also launched a challenge to the big beverage companies such as Coca-Cola and Pepsi-Cola by introducing his own Virgin brand beverage, Virgin Cola. In addition, after having won his first libel suit against British Airways, Branson was suing his competitor again, this time claiming damages in the United States. These are the issues that preoccupied Branson in 1994 and early 1995. There are also other long-term concerns that Branson will have to address in the coming years. As he approaches middle age, the question of succession arises. Market research has ranked Virgin among the top five brand names in the UK (among the top 25 in Europe) describing the company with words such as fun, innovative, daring, and successful. Branson’s image, face and personality (the "grinning pullover" to his detractors) are inextricably linked to his company. Entrepreneurs rarely pass on their heritage successfully. Without Branson, would his company lose the impetus and culture that has taken it to the position it now enjoys? Virgin has evolved over the years from a youthful enterprise to an established global corporation (see Exhibit 1). But is Branson capable of taking Virgin into the twenty-first century? What does the future hold? What potential dangers are out there, and what preventive steps should be taken to make the company better? Some observers of Virgin wonder whether the company, by engaging in ever newer ventures, will endanger the synergy between its various parts. Are the mechanisms currently in place still sufficient? Should Virgin’s flamboyant chairman be "controlled"? Is the risk-taking side of his personality a liability to the future of the company? Moreover, some analysts have raised the question about the extent to which the brand name could be affected as Virgin moves further and further away from its original core competences. The late 1990’s will undoubtedly prove to be a critical period in the development of the Virgin Group, as Branson faces simultaneously the maturing of his business and himself. “The Voice of Youth” In the summer of 1967, the headmaster of Stowe School, an exclusive English boys’ private school with a liberal reputation, faced a familiar dilemma. A 17-year-old student wished to leave before taking his final exams so that he could pursue non-academic interests. The young man wished to develop his growing magazine business which he operated in his spare time, using fellow students as workers and a nearby public pay phone as his office. Sensing Copyright © 1995 INSEAD, Fontainebleau, France. INSEAD 2 2122 the young man’s determination, and having discussed the matter with his parents, the headmaster finally agreed to the boy's leaving. At the time he was not sanguine about Branson's prospects, saying, "Richard, you will end up in prison or as a millionaire." Both prophecies were to prove correct. Looking back today, the headmaster can claim a small part of the launch of one of Britain's most fast-growing private companies -- led by his ex-student, the unconventional and flamboyant Richard Branson. Branson's brainchild, Student magazine, was a product of the 1960s, the decade when the post-war "baby boomers" came of age. Across Western Europe and North America young people enjoyed educational, employment and lifestyle opportunities unknown to their parents, all made possible by rapid economic growth. The decade became known for its promotion of youth culture, in which authority was challenged, fashions changed rapidly and rock stars became the global gurus of a new age. It was in such a climate that Richard Branson, tired of the boring inadequacies of the traditional school magazine and recognizing a "gaping hole in the market," founded his own publication. Aimed at people aged 16 to 25, Student was to be the "Voice of Youth" and would "put the world to rights." Its eclectic style reflected its founder's ability to commission articles by celebrities and to identify subjects not touched by many well-established magazines. Norman Mailer, Vanessa Redgrave and Jean-Paul Sartre, for example, all contributed pieces which appeared among articles on sex and rock music, interviews with terrorists and proposals for educational reform. The initial success of the magazine (Branson optimistically claimed a circulation of 100,000) prompted favorable notice in the national press. Branson was described in complimentary terms as "the editor, publisher and sole advertisement manager..., a teenage professional whose enthusiasm gets things done to an extent that would shame his elders." Certainly his energy and enthusiasm were needed to keep the organization going. The offices were transient, first located in a friend's basement flat, later in a disused church. The staff -- who in effect were a loosely-organized co-operative of friends, acquaintances and hangers-on who turned up to help -- distributed magazines, took copy and, frequently, avoided creditors. As Branson said at the time: "The staff all work for nothing. I supply them with somewhere to sleep and some food. It's not so much they are working for you as working with you." Not yet 20 years old, Branson found himself with the responsibilities of a much older person, employing ten people directly, walking a fine line between solvency and financial disaster, interviewing celebrities and appearing on television, rarely relaxing except to chase girls and indulge in escapades with his immediate circle. Despite his hedonistic lifestyle, and the casual organization of the magazine, Branson was always focused on business. His drive and facility for promotion were not enough, however, and Student magazine was not the financial success that Branson had expected. Seeking new activities to boost his flagging business, he decided to try and tap the potential in the sale of records, still over-priced despite the abolition of retail price maintenance, a UK Government policy designed to support certain industries by allowing manufacturers and suppliers to "recommend" prices to retailers. Copyright © 1995 INSEAD, Fontainebleau, France. INSEAD 3 2122 Lacking the capital to start a retail outlet, Branson and his associates simply placed an advertisement in the last issue of Student to test the market, listing the records likely to appeal to young people. The product range was mostly that of bands and singers on the fringe of the music world whose recordings were often not available other than in London stores specializing in alternative music. Most importantly, prices discounted those offered in stores by as much as 15 percent. Orders (with cash) came flooding in. Using the cash to place volume orders with record companies prior to shipment to his customers, Branson found he had created a cut-price mail-order record supply business that required little initial investment or working capital which had a significant competitive advantage over established retail chains. Casting around for a name for his new business, Branson rejected ideas for names that evoked the music and recording business, since even at that time he was thinking towards a future in which he would create a global brand not limited to entertainment. He finally accepted a suggestion made jokingly by one of his coterie that what they needed was a name that proclaimed their commercial innocence but which also had a certain shock value in keeping with the anti-establishment mood of the times. What better therefore, than "Virgin"? Virgin Records was not long in attracting the attention of the major recording companies, suspicious of the up-start’s large orders and pricing policy. Investigations led to an immediate ban on direct credit sales, which Branson successfully circumnavigated by using a small retail chain as a purchasing agent. But other problems arose. Branson quickly realised that buying and selling records in bulk required proper controls and systems. He turned therefore to a childhood friend, Nik Powell, to help him manage his new business, offering in return a 40 percent stake in the company. Methodical where Branson was erratic, cautious where Branson would overextend himself, Nik Powell became the ideal counterbalance in the record company, ensuring customers’ orders were correct, payments were made and staff properly deployed.
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