Business Stripped Bare Page 10

  Qantas shares promptly dropped 3 per cent.

  Virgin Atlantic began flying into Australia in December 2004. And Geoff never did wear the outfit!

  Brett is fastidious about his baby. A few weeks before Virgin Blue was floated on the Australian stock exchange, a group of financial journalists were waiting to interview him about the numbers. He was due off the flight from Brisbane to Sydney but there was no show as the last stragglers came down the exit ramp. An airport staffer was sent to collect him. He was on the flight, but he was helping attendants vacuum the aisles, remove the dirty drinks cups and recross the seat belts to ensure a faster turnaround. He knew that punctuality was the key to successful business – and flotation.

  On Thursday 13 November 2003, Brett and I were partying hard with a crowd of Virgin Blue people at the Loft cocktail bar in Darling Harbour. We staggered out at 4 a.m. Three hours later, and under the harsh lights of a television crew that had followed us throughout the process, we set off for meetings with bankers and investors.

  My meeting with Goldman Sachs a few days later was one of the most encouraging I have ever had in business. The Virgin Blue flotation was eleven times oversubscribed. Two hundred and fifty institutional investors were demanding 3.8 billion shares! Impishly, I wondered if I should call for Geoff Dixon to raise the white flag on his own business.

  On 8 December 2003, the day we floated Virgin Blue on ASX, we had a market capitalisation of A$2.3 billion. Virgin's return on its investment was staggering. But what was even more satisfying for me was seeing Brett, the founding partner, and his team also reaping the rewards of Virgin Blue's success.

  Brett's share was A$80 million. Today, he is one of the richest Australians under the age of forty-five, thanks to the millions he made from the flotation. Ask him why he doesn't want to go and retire to a Queensland beach, and he just shakes his head. He can see the opportunities ahead, when Virgin starts flying from Australia to the United States. And besides, he still loves running Virgin Blue.

  Maintaining a consistent tone in the face of rapid growth was a key requirement – and here, brand values helped enormously. I think Brett's naturally a Virgin sort of person. Had he never worked with us, his thinking would not be radically different today. But I believe thinking about the Virgin brand enabled him to focus, and to convey values quickly and efficiently to his colleagues and his staff.

  The business now employs over 4,200 people – and it is difficult to get around to everybody – but Brett insists on speaking at every induction course to new recruits. At these sessions he is refreshingly honest. He says that a cabin crew member's job can be tiring. If a person has the temperament to smile, stick with it and enjoy it, then that's fine; but he won't throw money at people because they're miserable. He believes it's ludicrous to pay people inflated salaries in order for them to have a bad time in a service job they hate. Look, he says, give it three years or so, then decide. If you like it, stay on – but if you don't then life's too short.

  Brett recently recalled to me, 'I was adamant when we started this airline that we would do it from scratch. There was an airline in New Zealand for sale and we didn't want to go near it. I felt we had to start with our own. Our airline wouldn't have been ours if we bought someone else's baggage.' (It's a point discussed earlier: you can't restructure culture. If you've burnt people, if you've killed their enthusiasm or commitment, then changing office spaces or putting a few more dollars in their pocket will not unduly affect the culture that exists.)

  At the time of writing this book, the aviation industry is facing global issues that are more challenging than at any time I have known. Virgin Blue and Qantas share prices have fallen and both are having to reduce capacity and look to cut costs to meet our soaring fuel bills. This is the time when a management team really have to prove how strong they are, and show calm leadership and good judgement. I think Virgin Blue was Qantas's wake-up call, and in Geoff they had a talented and capable CEO who has done the job that needed doing. On the other hand, the story of Virgin Blue has been one of bold expansion and great delivery; now, in order to weather these storms, Brett and his team will have to show other qualities, such as protecting your downside and assessing risk.

  Now, Virgin Blue is its own, unique proposition. The understanding of the Virgin brand is very strong, and they've taken it and run with it. They've hybridised the Virgin brand with their own national culture to produce something exciting and different – though I have to say success has not made Brett any less cheeky.

  On Saturday 29 March 2008, we held a ball for 3,000 people in our massive hangar in Brisbane, a twenty-minute ride from the city centre. Before the big event, I was invited to Brett's home for a VIP reception in the garden. I was a bit precoccupied that afternoon. I had just returned from Makepeace Island, which is being developed as a holiday destination for Virgin Blue staff, family and friends. It's a wonderful tropical island, teeming with wildlife. I had just been given a briefing about a campaign that was hotting up on the island. I was told that Makepeace was the indigenous home of the Queensland tree frog and that this was a protected species. Our plans for the island were endangering the frog and this was causing upset in the local community. I'd been told that there might well be a protest at Brett's VIP party, but that I didn't have to worry because the police would cordon it off. I presumed it was all under control, but the idea that we might have slipped up so badly over a hot ecological matter was concerning. Was I really so out of touch? I'd never even heard of the Queensland tree frog. Neither had anyone around me. Was I getting sound advice?

  So there we all were, in Brett's garden, with several major politicians, including Australia's Federal Treasurer Wayne Swan, when, at 4.40 p.m. exactly, Brett took a call on his mobile.

  He turned to me and said: 'Do you know anything about this, Richard? There are some protesters heading towards the house with placards and banners.'

  I told Brett about the frogs on Makepeace. 'They're Queensland tree frogs,' I said.

  Brett whistled through his teeth.

  'What?' I said.

  'Did you say Queensland tree frogs?'

  'Yes. What?'

  Just at that moment there was a commotion outside on the street and a security guard came bursting through to say that the protesters were heading for the garden. Within minutes, there was a band waving banners and shouting: 'Makepeace not war on the tree frog' and 'Sir Richard – shame on you.'

  Brett said: 'Richard, we've got to deal with these protesters and talk to them.'

  I just froze.

  'Richard, you have to talk to them. It's the Queensland tree frog for goodness' sake.'

  I couldn't think how to respond. But Brett stepped forward and I realised, with a sinking heart, that I had to give him moral support. I strode up beside him. Locking eyes with me, the protesters turned their protest signs around.

  The placards read: 'You've Been Punked, Love Brett.'

  *

  In 1973 the economist Ernest Friedrich Schumacher penned a collection of essays under the title 'Small is Beautiful'. It became a credo that was adopted by many as an antidote to the large conglomerates that ruled the business world. E F Schumacher was a great thinker, who made some exact predictions. He pointed to the end of fossil fuels and wrote that the West was consuming too large a proportion of the world's precious natural resources. He believed multinational corporations and heavy industrial conglomerates used up a vast amount of the world's resources yet accomplished little. He was one of the first people to point us in the direction of a sustainable world.

  When I read his work again in 1999 I wanted to find a positive direction for the Virgin Group. And I came to the conclusion that there was little purpose in us trying to become the biggest brand in the world. It was much more valuable to become the most respected.

  Once I would take a look at any business opportunity where the customer was being poorly served. Now the Virgin Group has more of a geographical focus. Today's priorities
for the Virgin Group are transport and tourism, communications and media, financial services, leisure, entertainment and music, health and well-being, and renewable energy and the environment. Not every Virgin business has been a soaraway success. But we've learned along the way. We've learned to improve what was already on offer and to look for areas where the consumer deserved better. We've learned to ride our luck.

  We are now a 'branded venture capital' company, and – given the importance of the word 'brand' in that definition – I think now is a good moment to say something about how we arrived at this way of doing things.

  In 1989, I asked Will Whitehorn, our former director of communications (now head of Virgin Galactic), to take a look at how companies similar to ours operated. We began to look at different types of business organisation, to see what suited a company such as Virgin. Will's report crystallised our options very neatly, identifying three models of corporate governance we should study further.

  America was home to the equity investment option. Big equity investors like Berkshire Hathaway (owned by Warren Buffett, the world's richest man), Blackstone and the Texas Pacific Group took a large share of traditional businesses that had good cash flows, and this proved to be an excellent way of making money for investors, including mutual funds and pensions. The Texas Pacific Group, for example, had stakes in Continental Airlines, Burger King, MGM and the Carlyle Group, one of the world's leading private equity groups.

  As a sure-fire way of turning a healthy profit, the equity investment option left us curiously unmoved. It certainly didn't sit easily with the energetic Virgin brand. These groups tend to sit back and simply provide capital. That's not the Virgin way of doing things. We like to get our hands dirty. There were aspects of its organisation that we liked – it could respond quickly to changes in the market, and bail itself out of trouble fast. But it seemed a bit anonymous for our taste, and altogether too concerned for its own well-being.

  The second business model Will identified came from South Korea. There, big business is conducted through 'chaebols', which are chiefly responsible for the nation's remarkable economic progress. The chaebol is usually controlled by a founding family, and its ownership is centralised. It is, at its heart, an old-fashioned family business – probably a manufacturing company – with subsidiary companies providing it with components. Companies such as Samsung, Hyundai and LG operate a range of businesses, from computer-chip manufacture to laptops, phones, PCs and motor cars. This makes the chaebol powerful in certain key industries – computers in particular. However, we saw that its 'family' structure made it difficult for it to raise vital funds at short notice. These companies tended to look after their own; and capital didn't flow so easily between them (an image with which we are all painfully familiar, as we cope with the 2008 global 'credit crunch').

  Will's third business model came from Japan. I have admired the Japanese technological revolution ever since I was running Virgin Records shops. In 1971, Japan was one of the first countries we exported records to, and I went out and launched a joint venture business there. Our Virgin Megastores were first into computer games and consoles with SEGA Nintendo, Atari and Sony PlayStation, all keen supporters of Virgin. And what I learned about the Japanese way of doing business has had a strong impact on us.

  Before the Second World War, Japan was controlled by a few major conglomerates under the system of zaibatsu. The zaibatsu were disbanded by the Allies because they wielded excessive political power, and their machine tools for making armaments and munitions were converted to the manufacture of items such as sewing machines, cameras and motorbikes. From these ploughshared industries, and excellent loans from Japanese banks, the keiretsu emerged, and they have since taken world leadership positions in a surprising number of industries.

  In 1984, in a Fortune listing of the largest 500 non-US industrial corporations, 146 were Japanese. Twenty-eight of the 100 largest commercial banks outside of the US were Japanese – with Japanese banks filling the top four spots. Toyota and Nissan became the third and fourth largest car manufacturers behind General Motors and Ford. Nippon Steel was larger than US Steel. Hitachi and Mitsushita Electric were second and third behind General Electric, and bigger than Philips and Siemens.

  When I started in business there were around half a dozen major keiretsu in Japan, and I have had business dealings with almost all of them in some way over the last thirty-five years. Where chaebols have a centralised ownership, keiretsu are held together by cross-shareholdings, and governed by a strong group of professional managers. So, for example, we have a company like Mitsubishi, set up around the Mitsubishi Bank, and working in a host of industries from cars through to brewing, oil, real estate and heavy industry. All of its companies are woven together, yet each is self-contained.

  I liked the fact that the keiretsu employed a lot of different corporate structures. Indeed, both chaebols and keiretsu were tempting models to adopt – were it not for the fact that they were so impossibly complicated for us to implement. On the one hand it was hard to see how Virgin could behave as a chaebol-like extended family network, given – well – we weren't really a family. As people, we certainly tried to behave well and responsibly to each other, but past that point the family metaphor began to break down. It suited neither our flexible way of working, nor the freedom each company enjoyed to pursue its own projects, nor the dizzying rate at which our top people joined, left, rang us up, worked with us again for a bit, vanished again, rang us up . . .

  Keiretsu presented us with a different problem. All these cross-shareholdings meant that everyone was working out of each other's back pockets, whether they wanted to or not. It meant we couldn't shed businesses without a lot of pain and, by the same token, our businesses couldn't build up their own head of steam without a lot of interference. Turn us into a keiretsu, and I could imagine all 300 companies in the group advising and cautioning each other to death. We'd disappear up our own internal politics in seconds.

  We wanted to do something that was like a hands-off keiretsu – something with venture capital corporate governance. This is where the American private equity model came in. We realised that, rather than tie ourselves in knots with cross-shareholdings like a keiretsu, we could emulate the best of American private equity companies, investing in all our companies like classic Western venture capitalists.

  So we were back to the venture capital model again.

  For a little while there, it felt as though we were going round in circles – but then it began to dawn on us. What would separate us from all the other venture capitalists and private equity houses out there? Our brand. Our worldwide brand name both advantaged our businesses, and bound them together. The solution had been staring us in the face all the time. Indeed, it was already in place and working well. We didn't need cross-holdings, or strong family structures: we had a flag.

  The bonding power of the Virgin brand has permitted us to take the bold decision to give everyone the opportunity to be entrepreneurs in their own right. It is a flag to which all members of our extended family pay due respect. They enjoy the advantages of doing business under the Virgin umbrella, and in return they agree to protect the integrity of the brand. If they don't, then we can legally withdraw the name. Everybody fights for their own particular Virgin company – and shares in the upside when things go well.

  The story of Virgin Active's growth is, in many ways, one of the best examples of Virgin's branded venture capitalism at work.

  In 1997, I was approached by Frank Reed and Matthew Bucknall with an idea to set up Virgin health clubs. The pair had just sold their company, LivingWell, to Hilton hotels and they wanted to have another crack at building a health club business with a difference. They felt that together with Virgin they could bring a sense of fun, value for money and quality to a market that was disappointing the customer.

  Some of the existing UK health clubs were a little tired, the membership fees too restrictive and the service unfriendly. In a way it was
not so dissimilar to the airline industry that we had launched against in 1984.

  Frank and Matthew spent two years researching and developing a Virgin product that would stand out from the crowd. The market seemed overcrowded to many and Virgin Active (as the business was called) would have to pass the test with our team.

  To their credit they managed it – the large family-friendly clubs hit the spot. In August 1999 we opened the first one in Preston. It was much bigger than the average UK health club and had that sense of fun and value for money which is core to so much of what we do.