Summary:

  • Most people misunderstand the way toward building a valuable company
  • Richard Branson has developed massive wealth by finding and entering growth markets
  • Success comes from developing new solutions that fulfill unmet needs – not maximizing performance of core capabilities
  • Virgin is now moving into luxury hotels, a market being ignored by most investors, with new products that fit still unmet needs

Very few people are as wealthy as Richard Branson.  But few people can manage like he does.

Branson started out selling records via mail-order in Britain.  Over the years he got into retailing, international airlines, domestic airlines, mobile telephony, international lending (amongst other businesses) – and now his company is investing $500milion in hotels and hotel management.  According to Bloomberg.comBranson’s Virgin Group to Invest $500million in Hotels.”

Despite all we hear about how impossible it is to be an entrepreneur in Europe, Sir Branson has done quite well, building a wildly successful, profitable company.  Although he didn’t follow conventional wisdom.  Instead of “sticking to his core” Sir Branson has built a company that invests in opportunities which are highly profitable – regardless of the industry or market.  He doesn’t grow by doing more of the same better, faster or cheaper.  Instead, he takes advantage of shifting markets – getting into businesses with opportunities and exiting those that don’t earn high rates of return.

During last decade’s building boom there were a lot of high-end hotels built.  Now, with the economy not growing, excess capacity has made it difficult for these to cover the mortgage.  Bankers don’t want to refinance – they want out of the buildings.  Occupancy has been so low that many traditional name brands, such as Ritz Carlton or Intercontinental, have been forced to abandon properties.  As a result, several hotels have closed, and the property offered for sale at a fraction of original construction cost.  With most investors shying away from all things real estate, prices have plummeted. Some hotels, nearly new, have sold for the value of underlying land.

And now Virgin enters the market.  Although Virgin has no background in real estate or hotel management, it is clear that there is demand for luxury goods and luxury travel — if someone can make it attractive and affordable.  By purchasing premier properties at a fraction (literally 10-25% of their initial cost) Virgin will be able to offer hotel guests a superior experience at an attractive price!  Management sees an unmet need by high-income, well educated “creative class” customers.  By getting into the market Virgin will learn, just as it did in airlines, how to meet customer expectations in a way that allows for highly profitable delivery when meeting a currently unmet need.

While some would say that if the current competitors, steeped in experience and tradition, can’t succeed Virgin should not think it can.  But a Virgin executive rightly says “If you look at Virgin’s history, we have come into markets with big powerful players, where customers are generally satisfied but not in love, and we have been able to cut through that.”  Well said.  Virgin doesn’t do what competitors do – it develops a solution that locks competitors into their position while positioning Virgin to meet the untapped market.

Even though this opportunity is available to everyone, almost no companies are interested in buying these undervalued hotels.  “It’s not our business.”  “We don’t know how to operate hotels.”  “We don’t invest in real estate.” “I’m too busy taking care of my current business to consider something new.”  “What if we’re wrong?”  These are all things people say to stop themselves from taking action to enter new opportunities with high rates of return. The magic of Virgin is its willingness to overcome Lock-in to its existing business, look for market opportunities, and then (as Nike advertises) Do It!

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