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Table of Contents
Table of Contents...................................................................................................1

Introduction........................................................................................................... 2

1.1 Company Overview:.....................................................................................2

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

1.3 Tools of Analysis:..........................................................................................3

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:........................................................7

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

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

5.0 Critical Assessment Effectiveness of above chosen Strategies:.....................11

6.0 OLI Paradigm Analysis of Virgin blue.............................................................13

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

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

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

7.2 Gap Analysis:..............................................................................................15

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

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

9. Conclusion:...................................................................................................... 17

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

AHMED NAYEEMUDDIN
ID: 08236986

MBA FULL TIME GROUP FEB 2009


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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

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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
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
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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 blue


Core 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:

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

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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.
(www.virginblue.com.au)

 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.
(www.virginblue.com.au)

 Simple Corporate structure: The Virgin’s success is standing


on corporate parenting strategy that every new SBU posses
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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


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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

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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.
(www.virginblue.com.au)

 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)

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 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.
(www.virginblue.com.au)

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)

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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

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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.
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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)

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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 blue


Dunning (1981) has developed an OLI Paradigm framework used to
analyze the decision to engage in FDI (Foreign direct Investment) which

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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).

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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:

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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.

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
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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:
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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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19 | P a g e VIRGIN BLUE AIRLINES

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Web Sources:

www.virginblue.com.au

www.worldairlineawards.com

www.virgin.com

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