GFT 123 Virgin-new MNC.pdf - Richmond School District No. 38

Virgin – the new breed of MNC?Geo FactsheetFig 2 MNCs: Modes of operationsMODES OF OPERATIONStrategic alliancesafter mergersDirect investmentabroadDynamic networks,entrepreneur ledInternationalsubcontractingInfluences:• market size• political factors• relative exchangerates• governmentincentivesNew buildMarket orientatedinvestment:• manufacturing• property• producer andconsumer servicesAcquisition andmergerBased on naturalresourcesSupply orientatedinvestmentProduction costbasedInfluences:• labour costs& availability• avoidingquotas, tariffs• investmentincentivesHost countrymarketRegionalmarketAssembly offinished productComponentmanufacturersLargely forexportLargely forexportLargely for export -limited host country marketReduced demand and increased competition creates unfavourableeconomic conditions. In order to survive and prosper, MNCs had tochange. Three main strategies exist, rationalisation, reorganisation anddiversification. Rationalisation refers to slimming down of theworkforce and their replacement by machines. By contrast,reorganisation includes improvements in production, administration andmarketing, such as an increase in subcontracting of production andadministration. Different parts of products are made at different assemblyplants and then shipped to other plants for intermediate or final assembly– i.e. regionalisation. Increasingly MNCs diversified and developednew products, notably financial services. This broader base makes themless vulnerable to economic collapse. The name conglomerate is usuallygiven to these very diverse MNCs. Sometimes the diversity is too greatand retrenchment back to the main business is necessary.MNCs are now:• greatly slimmed down, employing more people indirectly throughsubcontracting• integrating production, administration and marketing on a global scale• increasingly financially orientated – reflecting the globalisation ofservicesInternal changes may result from the entrepreneurial designs of the ownerand board of directors, who see opportunities for new investment ininnovative technology or the opportunity to acquire other companies atcompetitive prices.Virgin – a case study of economic diversificationWhy Virgin?Virgin was a name that proclaimed their commercial innocence butalso had a certain shock value, in keeping with the establishmentmood of the times, when Virgin was established (1970).Virgin is not a classic TNC but is more characteristic of the new generation.Globally it employs fewer than 20,000 people, with some indirectlyemployed via subcontracting. It is a company which is largely serviceorientated with very little manufacturing and does have strong interests infinance and e-commerce. All the diverse operations can be linked to theVirgin brand name. Research, in 1995, on the Virgin brand name showed thatthe brand was recognised by 96% of UK consumers and that RichardBranson was correctly identified by 95% as the company’s founder. Its imagewas perceived by the public as fun, innovatory, successful and trustworthy.This has clearly influenced the way that the company has developed.The actual groupings in the extremely diverse company reflect thepersonal interests and business philosophy of its owner – RichardBranson – essentially to look to the future to solve difficulties throughnew opportunities, expansion and growth. The groups reflect his interestin transport, travel, music, leisure and computing.For instance, Virgin moved into leisure (night clubs and airlines) in theearly 1980s following the collapse of the music business worldwide as aresult of recession and high inflation.Many of the business ventures are both high risk and very capital intensive (aparticular issue with the airline and train group). In 1990 Virgin Music wassold to raise money for airline expansion. Many ventures, for example inhotels, are joint ventures with companies and partners (especially in Japan).Whilst Fig. 3 emphasises the diversity of Virgin operations it is possibleto see a rationale with links between media and publishing, leisure andtransport, and financial services and e-commerce.Many of the latest ventures rely on franchising the marketing power ofthe Virgin name, for example in Vodka, Cola, Cosmetics and Wine, oftenusing e-commerce as a means of marketing.Virgin makes an excellent case study of a British based conglomerate thatoperates transnationally. On page 3, Table 1 shows a timeline of thedevelopment of the company and Fig. 3 shows the current range of thecompany’s operations and groups.2The general strategy is for Richard Branson and a team of advisors toresearch and develop new business, then to hand it over to an outstandingfinancial controller and managing director, who are expected to make thecompany succeed. So Virgin consists of numerous small companies,scattered quite widely around the world, operated quasi-independently.This is, again, different from the integrated style of traditional MNCs.