Strategic Management - Rolls Royce - Essay Example

?Introduction Rolls Royce is a world renowned brand in the engineering world. The brand was first established in the year 1884 when car manufacturersHenry Royce and Charles Rolls agreed to sell car under the name Rolls-Royce. As a result of the huge success of the alliance, Rolls-Royce Company was formed in the year 1906. Later on with the start of First World War, Rolls-Royce ventured into Aero Engine manufacturing in the year 1914. Later in the 1920’s Rolls Royce developed powerful ‘R’ engines which set a world air speed record in the year 1931. The years after has shown Rolls Royce grow into one of the main stream aero engine manufacturers in the world. A major makeover happened for the company in 1990 when it joined hands with BMW of Germany for manufacturing of aero engines. “Today it is the world's second largest civil aero engine company, the world's second largest defence aero engine company, a global leader in marine propulsion and a leading supplier of energy solutions. All of these businesses have gas turbine technology at their heart.” (Rolls Royce, 2011) Aero engine manufacturing is one of the largest engineering industrial sectors in the world. Some of the leading aero engine manufacturers in the world are Rolls-Royce Engines, BMW, Bristol Engine Company, CFM International, Pratt & Whitney, Daimler Benz, GE Aviation, Hispano-Suiza, Napier and Son, Volvo Aero, etc. Among these, Rolls Royce is one of the leading market players. Rolls-Royce Engines holds nearly one third of the business aircraft engine market. Some of the main customers of Rolls-Royce include Airbus, Bombardier, Embraer and Raytheon. Quality, Reliability and Tradition has been the main driving force behind the success of Rolls Royce Aero Engines. The key success factors of aero engine manufacturing industry are very critical. Some of the critical success factors of aero engine manufacturing industry are technology, Research and Development capability, Innovative product offerings, after sales service and better customer relationship. Technology is at the heart of the success of all the aero engine manufacturing company. In the case of Rolls Royce Engines, Gas Turbine technology is at the heart of every product. Likewise, a company should be self equipped with a technology of their own that gives them the greatest competitive advantage. Research and Development is the next success factor. R&D is the factor that drives every other success factors. Better technology is developed only through innovation. Technological innovation is possible only through better investment of time and resources into R & D. Innovative product offerings are the next success factor of the industry. Merely supplying engines is not the game plan currently. Some of the innovative plans of the industry are Corporate Care, power-by-the-hour, pay-as-you-fly program, etc. (George, 2011) Similarly, better after sales service and customer relationship management are another key success factors. The aviation industry segment can be classified mainly into two categories that are wide body engine market and narrow body engine market. As of now Rolls-Royce has considerable market share in the wide body engine market with the second position in the segment. But Rolls-Royce still needs to develop its presence in the narrow body market. Currently, Rolls-Royce participates in the narrow body segment in a joint venture with Pratt & Whitney and others. “Rolls-Royce is well positioned in the wide body market, but about to lose 25% of the narrow body market in which it has a 40% joint venture share by 2015.” (GLG Expert Contributor, 2010) Analysis of External Factors Like any other industry, external factors have great influence on the prospects of aero engine manufacturing industry. Some of the key external factors influencing the aero engine manufacturing industry are as follows. 1. Raw material cost 2. Competition 3. Bargaining power of customers 4. Environmental impact 5. Regulatory Pressures 6. Currency risk 7. Other external events Raw material cost: Raw material cost is one of the most important external factors affecting the aero industry. Cobalt, Titanium, Rhenium, Nickel, Tungsten, etc. are some of the major raw materials used for aero engine manufacturing. Among these, Rhenium is most important and rarest raw material. This raw material comes mainly from the mines of US, Chile and Kazakhstan. Reducing the usage of Rhenium is very much important for the industry in the coming years. Companies will have to invest heavily for developing alternative alloys instead of Rhenium. Many companies including GE has already started to develop recycling methods for reusing the Rhenium. Such activities will help to reduce cost of production to a great extend. Competition: Competition is very crucial in the aero engine manufacturing industry. The threat of competition is not from the new players but from existing players who are strategically well positioned along with Rolls-Royce engines. For Rolls-Royce, Pratt & Whitney is the major competitor to look at. This is a critical stage for Rolls Royce because the company is already facing problems with the engine failure that occurred with Airbus flights. This situation is an opportunity for the competitors to capitalize on their strategies. Rolls-Royce was having technological edge with its gas turbine engines. But now this technology is being used extensively by all the major players. This has increased the intensity of the rivalry among the leading players. (Rolls-Royce.com, 2011) The situation is made worse with the recent legal battle between Rolls-Royce and its arch rival Pratt & Whitney over patent rights. Situations became worse for Rolls Royce when the legal battle was won by Pratt & Whitney. This washed away huge order of Boeing from the books of Rolls-Royce. Therefore, the major rivalry for Rolls-Royce in the future is Pratt & Whitney. Bargaining power of customers: Bargaining power of customers is very high in terms of aircraft engine industry. In this industry, customers are the price makers and manufacturers are mere price takers. For an airline company, purchasing an engine is a long term decision. The size of the order is also huge. In such a case the expectation of the buyers are very high. For instance, if Airbus decides to purchase engines from Pratt & Whitney or GE, Rolls-Royce will lose the customer Airbus for a significant period of time. The main reason for this situation is that the numbers of aircraft manufacturers are very small in number when compared to the engine manufacturers. This implies that engine manufacturers need to be very keen on factors like quality, price and product offerings. Rolls-Royce is placed well in terms of product offerings. A major hit happened to quality when it faced engine failure issues recently. Cost reduction should be one major focus area for Rolls-Royce. This definitely involves more investment in Research and Development facilities. Environmental impact: Environmental impact is one of the most important critical success factors of aero engine industry. As environmental issues and climate change are the hot discussion topics now, reducing the environmental impact of the products is of utmost importance. “Failure to respond proactively to the escalating environmental challenge could result in a dilution of reputation, and ultimately loss of market share to competitors.” (The Free Library, 2011) Every leading company is on the race to develop more environment friendly products. The emissions of aircraft engines are similar to the ones that are emitted by other fossil fuel powered engines. But the impact of aero engine emission is higher due to the fact that it is emitted directly to the altitude. Rolls-Royce is investing heavily in its R&D facility to develop low noise low emission engines. Regulatory pressures: Aero engine manufacturing is a highly regulated industry. This is a very sensitive business segment. Regulations are mainly based on the safety and environmental friendly standards required for the segment. Safety standards are very crucial because even a small engine or parts failure can lead to serious accidents. It is not only important for the companies to comply with domestic regulations but also the international safety standards. Therefore the engine manufacturers have to offer continuous engine maintenance services to the airline companies. The cost of a regulatory breach is very high in the aircraft manufacturing industry. “Australia’s aviation regulator recommended Rolls-Royce Group Plc address a “critical safety issue” in its Trent 900 engines amid a probe of an explosion last month on an Airbus SAS A380 flown by Qantas Airways Ltd.” (Fenner & Sharples, 2010) This shows that safety qnd environmental regulations are very critical in the case of aero engine manufacturing industry. Currency risk: Currency risk forms another major external factor affecting aero engine industry. There are two ways in which currency fluctuation affects the business of Rolls-Royce. They are valuation of the orders and valuation of the foreign subsidiaries. Being the number two player in the industry, the size of the orders is huge. Moreover, most of the orders of the company are transacted in foreign currencies as the customers of the company are spread all over the world. Similarly, investments in foreign subsidiaries are long term investments for Rolls-Royce. Subsequent changes in the currency rates may adversely affect the valuation of the foreign subsidiaries thereby affecting the consolidated valuation of the company. Valuation is mainly affected by the exchange rates of USD to GBP and USD to EUR. Considering the economic conditions in Europe and UK, a very volatile exchange rate can be expected for these currencies for the immediate future. Other external events: Other external factors mainly consist of political instability, terrorism, natural disasters, etc. Political instability is very crucial at present. The current political unrest in some of the major oil producing nations has resulted in increase in the oil price. Such a price rise would result in the increase in cost of production. Terrorism is also one of the external threats. As Rolls-Royce being one of the most renowned aero engine manufacturers in the world, the company is exposed to threat from terrorism. This can also happen from another perspective. Any terrorist attack through the airline service side will probably lead to reduction in demand. Any reduction in demand on the air travel will considerably reduce the demand for aircraft engines too. Thus it may impact the business of Rolls-Royce. Conclusion The above analysis has clearly helped to understand the industry situation and the factors on which the industry’s success is depended on. As such it is important for Rolls-Royce to frame strategies in accordance with the factors. Some of the areas that Rolls-Royce needs to focus on are as follows: Recycling technology: Rolls-Royce should develop the technology to recycle the precious metals that are used in the engines. As seen from the analysis, metals like Rhenium, Titanium, etc. are rare and therefore contribute a large element of the cost of production. Through recycling, Rolls Royce can re-use such rare metals used in the engine and can reduce the dependency on suppliers. Companies like GE are ahead of Roll-Royce in terms of developing technology for recycling. Therefore, to reduce the cost and compete with the peers, Rolls-Royce should consider this as a near term strategy. The company should setup a separate recycling plant. This way the recycling activity should be centralized. Good after sales service: Compared to other industries, the responsibility of aero engine manufacturers does not end until long time after sale of engines. It should provide for good engine maintenance services even after the sale of engines. In terms of Rolls-Royce it has seen that the recent engine failures had questioned the quality of the engines. Such events can hit the brand image of the company hardly. Rolls-Royce should also develop innovative sales plan that will give the best deals for the customers. As the bargaining power of the buyers is higher, Rolls-Royce need to work more on the product offering side. Continuous R&D: More and more investments in R&D are very important for all other functions. Recycling technology can be developed only through continuous research. Also, all the next generation engines of Rolls-Royce should be more environmental friendly than the present ones. This should involve less noise and less emission. R&D is an activity that requires huge investments. Therefore, it should be made in such a location where maximum benefit can be reaped through minimum investments. In that case, India and China is the best location for Rolls-Royce. In India and China, all resources especially technology professional are available at comparatively lower cost than any other regions. Excessive quality check: Developing a thorough quality check of each engine is mandatory for maintaining the business and brand image of Rolls-Royce. Through proper quality check, issues can be identified even before the engines are delivered to the customer. In case of engine failure after delivery of engines, Rolls-Royce will have to compensate for the losses arising to the customer. That will adversely affect the profitability and brand image of Rolls-Royce. In order to avoid such instances, the quality check at the company should be made more sophisticated. Works cited Rolls Royce (2011) Rolls-Royce history timeline. [Online] Available at: http://www.rolls-royce.com/about/heritage/timeline/ [Accessed 22 April 2011] George, Fred (2011) Rolls-Royce Commands Nearly One-Third Market Share. [Online] Available at: http://www.aviationweek.com/shownews/02ebace/power03.htm [Accessed 23 April 2011] GLG Expert Contributor (2010) Rolls-Royce Facing Declining Narrow Body Market Share. [Online] Available at: http://www.glgroup.com/News/Rolls-Royce-facing-declining-narrow-body-market-share-50773.html [Accessed 24 April 2011] Rolls-Royce.com (2011) Competing with a changing world. [Online] Available at: http://www.rolls-royce.com/Images/competition_tcm92-11184.pdf [Accessed 26 April 2011] The Free Library (2011) Rolls-Royce Plc – Annual Financial Report. [Online] Available at: http://www.thefreelibrary.com/ROLLS-ROYCE+PLC+-+Annual+Financial+Report.-a0253477586 [Accessed 26 April, 2011] Robert, Fenner., Ben, Sharples (2010) Australia Regulator Finds ‘Critical Safety Issue’ in A380 Trent 900 Engine. [Online] Available at: http://www.bloomberg.com/news/2010-12-02/australia-regulator-finds-potential-flaw-in-a380-trent-900-plant.html [Accessed 27 April 2011] Appendix: Porters Five Force Analysis of Aero Engine Manufacturing Industry Power of buyers: Power of buyers is very high in the aero engine manufacturing industry. The number of buyers of the engines is comparatively low when compared to the engine manufacturers. The buyers are not only demanding low cost for the engines but also for the maintenance expenses of the engines. Another hidden threat in the buyer power is that if one of the leading players of the industry selects one engine manufacturer, the rest of the players will follow the league. Power of suppliers: In the aero engine industry, suppliers have limited power. There are a number of suppliers in the industry. Therefore, the engine manufacturers have a number of options for raw material souring. The only problem that the engine manufacturer will face is in the sourcing of rare metals. Competitive rivalry: Aero engine manufacturing industry consists of many players. But the three dominant players in the industry are Rolls Royce, Pratt & Whitney and GE. All three players are equally competent. But in the recent years the rivalry has become very intense. The main reason being increased demand and increased technology development. Threat of new entrants: There is absolutely no threat of new entrants in the industry. Aero engine manufacturing is a highly capital and technology intensive industry. It requires huge capital investment. The barriers of entry in the segment are R&D cost, customer confidence and huge capital requirement. Threat of substitutes: Threat of substitute products are also absent in the aero engine industry as there is no substitute product for an aero engine. Even reduction in demand of air travel will cause only negligible effect on the aero engine industry. 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