final bsr report (2016)

Business Strategy Report

N1079

CandNo: 134492

Rolls-Royce Holdings plc

Business Strategy Report – Rolls-Royce Holdings plcCandNo: 134492

Executive Summary

Civil aero engine is a mature industry with intensive competition among competitors. Rolls-Royce

Holdings plc. is one of the three major manufacturers dominating the industry. It is a British

multinational public holding company founded in 1906 by Henry Royce and Charles Rolls in

Manchester. This report aims to analysis the failure of Rolls-Royce and suggest possible solutions for

the company to overcome the problems.

In external analysis most of the factors are stable except that the company will need to face the

worldwide political issues and unstable economic factor. In internal analysis, the company does not

have a positive working culture which leads to the failure of the company. Under a highly

competitive environment, the company will need to implement strategies to retain its customers

and ensure the supply of materials. It is also essential for Rolls-Royce to strength its key success

factors and to maintain its competiveness.

With the analysis and the tools to generate strategy, a few strategies are suggested, including

Vertical integration, Engine replacement scheme, New geographical markets, Flight record system,

Retain talented people strategy and Reward and punishment scheme. After using different ranking

methods to rank the strategies, Vertical integration and Engine replacement scheme are highly

recommended for the company, Retain talented people strategy and Reward and punishment

scheme will also be suggested. Vertical integration with small component and electronic control

manufacturer aiming to lower the production cost and to encourage the creation of new engines.

Engine replacement scheme aims to retain customers by providing them an improved engine with

discount. Retain talented people strategy and Reward and punishment scheme aim to change the

working culture to a more encouraging and innovative place.

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Table of ContentsEXECUTIVE SUMMARY....................................................................................................................2

1.1 PROFILE OF THE INDUSTRY, SECTOR, COMPETITORS, CONSUMERS & COMPANY.............................................51.1.1 The company.........................................................................................................................51.1.2 The trend – civil aero engines...............................................................................................61.1.3 Industry key players..............................................................................................................61.1.4 Market share........................................................................................................................7

1.2 ORGANIZATIONAL PURPOSE................................................................................................................91.2.1 Mission..................................................................................................................................91.2.2 Vision....................................................................................................................................91.2.3 Value statement:..................................................................................................................91.2.4 Mission, Vision and Value statement analysis....................................................................101.2.5 Financial analysis................................................................................................................11

1.3 EXTERNAL, INTERNAL AND COMPETITIVE ENVIRONMENT........................................................................121.3.1 External analysis - PESTEL..................................................................................................121.3.2 External analysis - SWOT....................................................................................................131.3.3 Internal analysis - SWOT.....................................................................................................131.3.4 Internal analysis – VRIN......................................................................................................151.3.5 Competitive environment - Porter’s 5 forces.......................................................................15

1.4 BASIC OF COMPETITION & KEY SUCCESS FACTORS................................................................................17

2. STRATEGIC DEVELOPMENT.......................................................................................................182.1 EXISTING STRATEGY(S)....................................................................................................................18

2.1.1 Business stream level..........................................................................................................202.1.2 Corporate level....................................................................................................................21

2.2 GENERATION OF STRATEGIC OPTIONS.................................................................................................232.2.1 External strategies..............................................................................................................232.2.2 Internal strategies...............................................................................................................25

2.3 EVALUATION AND RANKING OF OPTIONS.............................................................................................292.3.1 Ranking of Strategies..........................................................................................................292.3.2 Evaluation - SAFe Criteria....................................................................................................30

2.4 CHOICE OF STRATEGY......................................................................................................................31

3. IMPLEMENTATION....................................................................................................................323.1 GANTT CHART...............................................................................................................................32

REFERENCE...................................................................................................................................33

APPENDIX.....................................................................................................................................38

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Table of Tables Table 1: Rolls-Royce financial analysis ................................................................................................11

Table 2: PESTEL....................................................................................................................................12

Table 3: SWOT - OT..............................................................................................................................13

Table 4: SWOT - SW.............................................................................................................................14

Table 5: VRIN.......................................................................................................................................15

Table 6: Porter's 5 forces.....................................................................................................................16

Table 7: Rolls-Royce Value Chain analysis...........................................................................................26

Table 8: Marketing Assets....................................................................................................................27

Table 9: Rolls-Royce Dynamic marketing capabilities..........................................................................29

Table 10: Strategies Ranking ...............................................................................................................29

Table 11: SAFe Criteria ........................................................................................................................30

Table of FiguresFigure 1: Global Commercial Engine Market Share Trend 2011 – 2015 ................................................7

Figure 2: Commercial Engine Market Share Trend - GE, PW & RR 2011-2015.......................................8

Figure 3: Generic routes to competitive advantage creation ..............................................................19

Figure 4: Porter's generic strategies I .................................................................................................20

Figure 5: Ansoff Matrix I .....................................................................................................................20

Figure 6: BCG ......................................................................................................................................21

Figure 7: ADL .......................................................................................................................................22

Figure 8: Porter's generic strategy II ...................................................................................................23

Figure 9: Ansoff Matrix II ....................................................................................................................24

Figure 10: Value Chain ........................................................................................................................25

Figure 11: Dynamic marketing capabilities .........................................................................................28

Figure 12: Gantt Chart.........................................................................................................................32

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1. Strategic Analysis 1.1 Profile of the industry, sector, competitors, consumers & company

1.1.1 The company Rolls-Royce Holdings plc. is a British multinational public holding company founded in the 1906 by

Henry Royce and Charles Rolls in Manchester, and is a manufacturer of luxury cars (48). The company

was mainly responsible for the production of road vehicles until 1973 when the company diverged in

order to expand their business, creating another company known as Rolls-Royce Motors. Rolls-

Royce is well known for their aero engines (48). They created their first aircraft engine in 1914, and

by 1920, majority of Rolls-Royce’s business comprised of aero engine production. Rolls-Royce has

customers from over 150 countries and operates in more than 50 countries worldwide, with an

estimated of 550,000 employees. Rolls-Royce Holding plc. provides a wide range of products and

services, including civil aerospace, Defence aerospace, Nuclear, Marine and Power system (48).

This report will mainly focus on the civil aero engine business stream. Rolls-Royce mainly focus on

two main markets:

1. Sales of brand new aircraft engines to aviation industry leading manufacturer Airbus industry

and Boeing and to some other airlines as well (48).

2. Spare part to those old purchase engines and aftermarket services and maintenance to its

customer airlines. This segment of market consists competitors who specialized in

maintenance (48).

Recently, their civil aero engine performance deteriorated significantly. Financial professionals

identified a few main problems that the company faced. The problems have been listed below:

1. Global economic downturn: the drastic drop of oil prices from 2014 until present day (58) (See

appendix 1)

a. Which led to extensive cancellation of different programs and orders. This has cost

Rolls-Royce a huge loss during this period of time.

2. Decision to exit IAE and not join Pratt & Whitney in developing the Geared Turbofan for the

single aisle market (1).

a. Lost the chance of sharing information and resources with other competitors (55).

b. Reduced chances of joining the group and working on huge projects, which could be

beneficial in the long run.

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3. Imbalance in the allocation of resources as well as the inability to develop successor out-of-

date engines (1).

a. With inequitable resource allocation, the research and development on some

engines will be slower and it will give the competitors a chance to take over the

market. For example, the company has devoted heavy resources to A380 but not

AE3007, which gave Pratt & Whitney, GE and Sanfran the chance to dominate the

market of AE3007 (40).

4. First loss in a Gulfstream engine competition (1).

a. The image and reputation have dropped substantially after they lost in the

competition, because this is the very first time they lost in the Gulfstream engine

competition, with rumours speculating that they lost their talents in order to create

better engines.

1.1.2 The trend – civil aero engines The industrial trend is to reduce the number of in-flight engine shutdowns, abort take-offs and flight

delays through the use of advanced engine health monitoring technology (38). Currently, Rolls-Royce

invests monumental effort in reducing the number of in-flight engine shutdowns, aborted take-offs

and flight delays through the use of advanced engine health monitoring technology (44), which is

beneficial to society. There is an inherent shift in the emphasis placed by the companies, where

instead of selling engines to customers, there is a fundamental shift to adopt the power-by-the –

hour contracts. These airlines make fixed regular payments based on the number of hours flown and

the engine manufacturer retains responsibility for engine maintenance (35). To support this new

approach, improvements made to the in-flight monitoring of engine have been introduced with the

collection of more detailed data on the operation of the engine. More Boeing 737 is dominated by

CFM, GE Aviation is taking action to dominate Boeing 747, 767 and 777 plane (23); with Pratt &

Whitney dominating the geared turbofan engine which suitable for Airbus A320 neo (38)(40).

Although Rolls-Royce launched their TrentXWB engine for the redesigned A350XWB (53), the period

between the development and the launch will take a long time, which may not be fast enough to

compete with its competitors.

1.1.3 Industry key players There are 3 major manufacturers dominating the large commercial jet engine – GE Aviation (GE)

corporate parent is GE, Pratt & Withney (PW) corporate parent is Limited Technology Corp. and

Rolls-Royce PLC (RR). GE, the biggest competitor for Rolls-Royce, they have the biggest market share

in the industry and during the past 5 years, they maintain over 40% of market share in the past 5

years (22).

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1.1.4 Market share

2011 2012 2013 2014 20150%

20%

40%

60%

80%

100%

120%

62%

38% 38% 39% 41%

9%

21% 22% 19% 22%

14%

10% 10% 10%11%

6%

12% 12% 12%10%

5%13% 13% 11%

12%4% 6% 5% 9% 4%

Global Commercial Engine Market Share Trend 2011-

2015CFM GE Aviation (GE) IAEPratt & Withney (PW) Rolls-Royce PLC (RR) Others

Figure 1: Global Commercial Engine Market Share Trend 2011 – 2015 (4)(9) (34) (36) (45) (63)

From the above figure 1, we can see the general trend of market share. The market share of Rolls-

Royce only decreased by 2% in 2014 and it went up again by 1% in 2015. It appears that the

company’s performance is considerably decent. However, there are lots of joint ventures in this

industry. For example, the CFM, having the highest market share among all the companies, is a joint

venture company where 50% of the share belongs to GE. Therefore, if we recreate the market share

bar chart, the real changes during this past few years can be seen.

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2011 2012 2013 2014 2015

40.00% 40.00% 42.00% 39.00% 42.50%

10.55% 18.50% 18.50% 18.50% 17.15%9.55%13.00% 13.00% 11.00% 12.00%

39.90%28.50% 26.50% 31.50% 28.35%

commercial engine market share trend - GE, PW & RR 2011 - 2015

GE Aviation (GE) Pratt & Withney (PW)Rolls-Royce PLC (RR) Others

Figure 2: Commercial Engine Market Share Trend - GE, PW & RR 2011-2015 (2) (7) (14) (15) (20) (36) (63)

The above recreated chart shows that the market share of Rolls-Royce is relatively small, and as they

exited, the IAE and PW purchased all its shares. This indicates that Rolls-Royce is being threatened

by the other 2 competitors, and they will need a strategy to be more competitive and boost its

market share.

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1.2 Organizational purpose 1.2.1 Mission“Trust to Deliver Excellence” (46) (48) (50)

They embody the values of the business: trust, deliver and excellence, in which they define the

terms as following:

Trust: is something we know can only be earned. It comes from the way we behave towards our

colleagues, our customers, shareholders and partners. They need to know that we can be relied on

to do the right things in the right way (48) (50).

Deliver: part of earning trust is delivering on our promises. We seek to meet our customers’ needs

by ensuring the quality, performance and reliability of our products and matching this with first-class

services that has value and can be replied upon (48) (50).

Excellence: standard, a way of life; few companies can aim higher. If we can be trusted and we

deliver on our promises, then we will be regarded as an excellent company; one that people are

proud to work for, work with and invest in (48) (50).

1.2.2 VisionTheir vision is to create a “better power for a changing world” as the world is changing constantly

around us (51) (52), Rolls-Royce believe that they can help by developing a power system, enhancing

the quality and continue to strive for the better and create new standards for business to conduct.

Rolls-Royce is the leading aero engines manufacturers in UK, with the largest market share (over

50%) in UK. They export their civil engines to worldwide companies, and also work with

governments and provide defence aerospace marine engines to them.

1.2.3 Value statement: 1. Being part of Rolls-Royce team means (51) (52)

o Being trusted to deliver excellence for our customers, business and people

o Leading with openness and honesty

o Being personally valued and recognized, with a voice that is heard

o Enjoying your work and sharing mutual respect with your colleagues.

2. Creating a culture that drives performance (48) (51):

o We have nurtured a culture where managers lead by example and our employees

are focused and flexible team players. Rolls-Royce is all about performance, where

they create high expectations and unlock potential. They recognize exceptional

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contributions and inspire others to reach the same heights. They have a role in

exploiting individuals and their collective talents.

1.2.4 Mission, Vision and Value statement analysis However, the working environment is good as the company has previously alluded to. In the

reviews, both the present and ex-staff have pointed out a few key problems with regards to the

internal issues in the company.

1. The biggest problem is that the company is adopting a slow pace, which will take the

company a long time to solve a problem (24) (see appendix)

2. Decision-making is a long and complex progress, and may ultimately lead to a poor

communication of change (42).

3. It is a very bureaucratic company and people are not willing to change (24)

4. Difficulty in retaining good talent due to antiquated ways of managing staff (24)

5. The enterprise information systems project implementation is unsuccessful because of poor

management and implementation process, including poor communication (24)

From the reviews, we can see that the company does not have schemes to encourage employees to

be more innovative and create new engine models.

Secondly, the company stated that employees’ opinions and feedback will be reviewed. However,

the truth is that the company is a hierarchical one and there are lots of layers in management, and

employees said it is not easy to communicate and to express their ideas to senior managers.

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1.2.5 Financial analysis 2011 2012 2013 2014 2015

Profit before tax (£m)

1105 2766 1700 67 160

Operating profit (£m)

1186 1373 1479 1390 1499

Cost of Sales (£m)

8676 9416 11482 10533 10459

ROCE 21.24% 41.27% 21.10% 1.72% 2.91%Turnover (£m)

11,124 12,161 15,513 13,736 13,725

Current ration

1.20 1.33 1.31 1.46 1.48

Inventory turnover period (£m)

107.74 105.67 105.51 95.92 92.03

Gearing 1.10 0.80 1.11 1.28 1.82Gearing 2 0.52 0.45 0.53 0.56 0.64Table 1: Rolls-Royce financial analysis (25) (29) (33) (45) (46) (52) (58)

From the above analysis, we can see that the company performances drop a lot in 2014. The profit

of the company drop dramatically in 2014, and the recovery in 2015 is not high. This indicate the

company may need a few years to recover.

Return on Capital Employed (ROCE) aim to measure how efficiently a company can generate profits

from its capital employed by comparing operating profit to capital employed. Rolls-Royce most

efficient year is in 2012 (41.27%) and 2014 (1.72%) is the worst. The reason for the ROCE drop is

because the operating profit drop 89 million pound and the capital employed increased by 738.05

million. This indicate that in 2014 the company increase their capital employed but it didn’t help to

generate more profit which means the efficiency of the company is very low. And it didn’t recover

much in 2015.

The gearing ration measure the proportion of the company’s borrowed funds to its equity. Rolls-

Royce do have a relatively higher gearing ration compare to the industry average (gearing 1: 1.0 and

gearing 2: 0.48) this indicate that they may have a financial risk as the excessive debt can lead to

financial difficulties.

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1.3 External, Internal and Competitive environment 1.3.1 External analysis - PESTEL (See appendix 3 for detailed PESTEL)

Political factor Strong political influence (14) UK government intervention to avoid

potential foreign takeover of Rolls-Royce Sanction may cost delays and

cancellation (57) Major receiver of funding from

government which puts them in a powerful position (5)

Benefit from a relative stable democratic government

Import and export policies and controls (57)

Decrease in government spending Subsidies by UK government US tax

breaks for Rolls-Royce (26) Carbon emission under the Kyoto

protocol is target for reduction by EU, creating pressures for reduced impact of air travel (35)

Economic Factor Worldwide recession (12) (21) Fierce competition, savvier customers

and economic headwinds are adding to pressure to cut cost (16)

Cost of production high (34) Currency risk (34)

Social factor Civil aerospace correlated with trends in

airline sector (17) Airline influence by demand of global

population; Increase number of passengers travelling by air (2) (3)

Outbound Travel Alert affect the number of people travelling

Growth of aviation (7)(9) Demand for aftermarket product +

services increase ie. long-term contract (28)

Technological factors Innovation of new materials and design Advanced technology help to shorten the

time for new inventions Many years of experience and R&D –

forefront for technology IT security Product performance Risk of technological obsolescence, with

long delivery cycles

Legal factor REACH (Registration, Evaluation and

Authorisation of Chemicals) Norms Articles interpretation Employment protection: Health and

Safety important in manufacturing and also in liability for air safety(17)

Environmental standards and legislation EU/US law and WTO ruling on

competition

Environmental Factor Geographical location limitation (19) Unstable weather conditions Supply chain performance (8) Capability of global resources Reduction in consumer demand due to

concerns regarding climate change (20)

Table 2: PESTEL

Political and legal factor will be the key affecting the aero engine industry, especially for Rolls-Royce.

There are many regulations for importing and exporting engines to foreign countries, since aero

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engines companies do provide products and service to the military in different countries. Therefore,

governments will implement different policies in order to protect their own interest.

Economic and Social factors are also factors that the company need to be concerned about when

making a decision. There is evidence that when the demand of aeroplane increases, the demand of

aero engines will increase correspondingly. However, the industry is facing fierce competition and

the economy is going through recession, which coerces companies to reduce cost in order to survive

and brave the adversity.

1.3.2 External analysis - SWOTOpportunity

Government intervention prevent takeover from other company (32)

Government funding have sufficient funding for project (28)

Increased demand for commercial aero engines due to the demand of air travel increase

Sales of engine correlated/ dependent on sales of aircraft

Rolls-Royce is well positioned both geographically and technically to service the huge aircraft market in the future.

Increased demand for turbine helicopters

Threat Economic recession (60) Government policies compatibilities

(38)o Import and export controlso Sensation policy of other

countries High level of competition

Competitors start to dominate some of the aero engine model

Risk for supply chain

Table 3: SWOT - OT

1.3.3 Internal analysis - SWOT Strength

Good relationship with:o Suppliers & buyers (especially

Singapore airline)o European government

Investment in US to smoothen the political issue

Major player in aero-engines manufacturing

Business have reach to different parts of the world market

High capacity for R&D

Weakness Brand image decrease due to loss in

engine competition and failure to improve the engine AE3007 model

Working environment is getting worse Culture of the company causes an

associated negative impact, which may adversely affect the performance of R&D

New CEO could not handle the media (24)

Long decision-making process which may not have been accurate

The way that Rolls-Royce dealt with legal affairs is not mature enough, fines and other remedies hampered the image of the company as well as the business, position and operations

Table 4: SWOT - SW

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1.3.4 Internal analysis – VRINCompetency Valuable Rare Inimitable &

Non-substantiate

Exploitable by the firm?

Competitive outcome

Relationship between customers

Yes Yes No Yes Yes

Company name and reputation

Yes No No Yes Yes

Design/ Product

Yes No No Yes Yes

Product expertise

Yes No Yes Yes Yes

Innovation Yes Yes No Yes YesSecurity of supply

Yes No No No Yes

Supplier network and relationship

Yes Yes No Yes Yes

Information system

Yes Yes No Yes Yes

Table 5: VRIN

VRIN shows the competitiveness of the company. ‘Inimitable and non-substantiate’ is evidently the

most significant problem that the company needs to face, as competitors can easily copy knowledge

and services. The regular press conference and participation in the exhibition will increase the

chances of information leakage. Also, during the news conference of launching a new engine, the

company will need to explain the new features or the new materials used in the design, which

provide competitors a chance to copy our product or ideas. Also, when the company fail to keep the

employees, the chance of information leakage increases.

On the other hand, the company does have the ability to exploit the resources, which can increase

their competiveness.

1.3.5 Competitive environment - Porter’s 5 forcesBargaining power of Buyers

Middle - High: long term commitment to purchase an aircraft engine. Customers prefer a trusted brand (11)

Limited numbers of buyers and increasing level of global carriers within airline industry Globalisation of the many airlines in recent years has enhanced their purchasing power to

great extent (4) Long-term decision to buy a specific aircraft or any combination of aircraft engines

therefore they will compare different models and choose carefully (15) Easy for them to get new information from other parties and the customers can easily

change aero engine suppliers

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Increased referral once a sale has been madeBargaining power of supplier

Depends Aero engines manufacturer are involved in many different source supply applying double

supplier strategies. Supplier of high end technology like complicated electronic control component have the most bargaining power where the suppliers of the smaller components are decreasing in the recent years (42).

Threat of new entrants Low This is a reputed market and high cost of R&D and need approval from the authorities Also, it is hard to win the buyers’ confidence for new entrants (29) Aero engines market dominated by GE, RR & P&W The name of the company also plays a vital role in this industry due to the sensitive nature

of this marketThreat of substitute

Low There is most likely no substitute for air travel because of time constraints, and although

options like high speed trains are available, they are not utilised (13) Due to nature of sector, “substitute products” difficult But still these emerging technological developments taking place along with increasing

opportunity of air travelRivalry within industry

High This is an oligopolistic global industry is dominated by 3 main players (General electric GE,

Rolls-Royce and Pratt & Whitney) fuelling a balance, resulting in intensified rivalry (19) Civil aerospace engine industry is highly budget oriented as it requires massive capital

investment for advanced technology and R&D. Single manufacturers find it difficult to dominate the market, which leads to the increased

competition among the opponents. (20) In recent years, each producer tried to enhance their volume share, which brought a

healthy competition to the existing market (20) Wide range of labour, industry is well developed

Infrastructure available in UK + sources of capital and nature resourcesTable 6: Porter's 5 forces

Overall aero engine is a highly competitive industry as there are only a few players in this sector and

there are a few buyers. The barriers of entrant is high and the threat of substitute is low, thus

companies can focus on the existing competitors and fight for their market share. However, the

barging power of buyers and suppliers are relatively high. Therefore, companies should impose

strategies in order to retain their customers and ensure their supply.

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1.4 Basic of competition & Key Success FactorsThere are four main key success factors for the civil aero engine industry.

Partnerships with Government agencies

Becoming a partner with government agencies will be a key for the company to success. As the

company will have funding and support for the university infrastructure, complementary basic

research, which seek to attract key researchers. Besides, it is easier for the company to reach

customers worldwide, as it will be hassle-free to get through the legal process.

Customisation of approach for different countries and cultures

This can help customers contact the company more easily. In the long term, with increased

ease of contact, it can attract customers. Ostensibly, the approaches employed by the

companies will be a key factor taken into the consideration of customers when they make

decisions.

High quality control standard

This can ensure that the company will provide products of high quality, and can prevent any

accident caused by mistakes.

Well-developed aftermarket services

These services can help to keep the customers as they can maintain the life expectancy of

an engine. This will also be a key element when customers make their decisions.

Advance IT system

The process of creating engine involves a lot of calculation and design. It will require a good

IT system and software to work on and to record all the processes. Clearly, an advanced IT

system is essential. Beside, easily accessible information will enhance the operation

mechanics and lead the company to eventual success.

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2. Strategic Development 2.1 Existing Strategy(s)Their existing strategy is to focus on differentiated, mission-critical power systems, which create

tough barriers to entry in our chosen markets. Leverage world-leading engineering can drive growing

market shares. This will capture long-term aftermarket value and deliver profitable growth.

Engineering excellence (44)

o Investing in and developing the excellence of our engineering to produce high-

performance power systems.

Operational excellence (44)

o Transforming our manufacturing and supply chain to embed a lean approach across

our facilities and process

Capturing aftermarket value (44)

o Leveraging our installed base, product knowledge and capabilities to provide

outstanding services to customers

Currently, Rolls-Royce is facing a financial disadvantage (figure 3) due to the economic recession,

and their decision to exit IAE and not join PW in developing the geared turbofan for single market.

Their income and support from the third party has since dropped and this made them suffer. After a

number of profit warnings from 2014 to 2015 (41), the company’s emergent strategy was to cut cost

and to boost its brand image. In 2014, the company had cut 5% of its work force due to the drip in

demand and it mainly occurred in its aerospace division (41). In 2015, there was a major

management restructure in the company in order to cut cost once more (49). However the company

need more strategies to tackle the problems and to recover from the failure. Rolls-Royce will be

implementing strategies to aim market advantage (figure 3).

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Figure 3: Generic routes to competitive advantage creation (29)

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2.1.1 Business stream level

2.1.1.1 Porter’s generic strategies

Figure 4: Porter's generic strategies I (29)

Currently the company is on a differentiation side where they hire talented employees to help them

differentiate their products from the competitors.

2.1.1.2 Ansoff matrix

Figure 5: Ansoff Matrix I (29)

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Rolls-Royce current strategy is product development, in the past years the company develop new

engines, nuclear energy and power system in the past years. Also they planned to develop and move

into new markets too. However, they have not take any action for market development yet.

2.1.2 Corporate level2.1.2.1 BCG

Figure 6: BCG (29) (31)

According to the market share and the growth rate data, there is still a question mark when it comes

to the power system and the nuclear business, as there is still a long way for the business to grow

before entering the mature level (see appendix 4 for industry life cycle). In addition, we are still

unsure of the popularity level of these product and services. However, there will be a great chance

for these two businesses to become the star product of the company as the demand of energy is

growing and many industries will need an easy access and safe power system operate in their

products.

The civil and defence aero engine are still the cash cow of Rolls-Royce. Although the business is

dropping, these 2 businesses have generated over 50% of the company’s total revenue (48). With

the appropriate strategy implemented, civil can again become the star product of the company.

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Marine business will be a question mark product too, but it will be more close to the middle point, as

the business rate is medium and their relative market share is not very high (51). More investment

will be required in order to stand out and attract more customers in this business.

2.1.2.2 ADL

Figure 7: ADL (29) (31)

The ADL matrix used the dimension of environment assessment and business strength assessment to

identify the general strategy. Rolls-Royce’s nuclear and power system business is in the growth stage

where the demand is increasing and more companies wish to enter this industry (61). There are a

few of larger player in this industry but not a dominating one. Therefore, it will be located on the

GrowthXFavourable, where the company can attempt to improve the business by investing more

these two areas and try to develop a safer and easier way for people to access the energy and the

system.

Civil and defence aero engines will be located on the MatureXFavourable. Although the engine

sector is more mature, the growth rate has been slowing down and the competition is intense. The

company provide quality engines to their customers. However, the company has failed to regularly

provide new inventions or the enhancement of old engines (1). Along with the economic recession

and wrong decisions made, especially the civil aero engine business stream, the damage inflicted is

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significant. Rolls-Royce should find ways to boost their research and development to create a more

competitive advantage when pitched against others in the industry.

Last but not least, the Marine business is located on GrowthXTenable. There are only a few

competitors in this particular industry as the cost of setting up this business is very high, and it also

takes a long regulation process before the business can be started (51). As a result, this business

performance in Rolls-Royce is not performing well. Hence, the company will need to differentiate

their marine products from other competitors in order to protect their business.

2.2 Generation of strategic options From the financial analysis, the ROCE indicate that the company did increase the capital employed in

2014 trying to generate more profit for the company. But these actions fail. Tolls will be used in the

following to analysis and generate the strategy that Rolls-Royce should follow in order to improve

their financial performance and be more competitive.

2.2.1 External strategies

2.2.1.1 Porter’s generic strategy

Figure 8: Porter's generic strategy II (29) (31)

Rolls-Royce is moving towards a differentiation, the resources from the power system and marine

business that can be used in the aero engine business. However, their biggest competitor GE is a

diverse company, they have 12 different business stream operating and a multinational parent

company supporting them. This shows that Rolls-Royce will need to put extensive effort in order to

become a differentiate company and to compete with its competitors. Becoming a differentiate

company may be difficult to the company Vertical integration could be another choice for Rolls-

Royce to choose. The R&D department of Rolls-Royce is well-developed and they have sufficient

amount of resources and talented people working in the company. Backward vertical integration

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means Rolls-Royce can invent and manufacturer new materials for the engines. Inventing new

materials for the engines can inspire engine designers to improve their old model and to design new

and more effective model in the future. Moreover, the company can benefit from it, the company

will have more control over the supply and they may enjoy a lower production cost. Besides, the

company can also create data collection and information system for aeroplane, as it is vital to collect

all information during the flight.

2.2.1.2 Ansoff

Figure 9: Ansoff Matrix II (29) (31)

Market penetration allows the company to maintain or increase their market share of their current

products. It also allows the customer to secure dominance of growth markets and to increase the

usage by existing customers. The company can introduce loyalty schemes to attract and keep their

customers. For example, the company can implement an Engine Replacement Scheme. When the

company creates a better engine to replace the old one, the customers can enjoy discounts to

change their engine and they do not have to repurchase the whole aeroplane. Most importantly,

the companies can seek to improve the quality of products and services. High quality products and

professional services are the most important in this industry, as tiny mistakes would not be

permitted in this market. Company can increase the quality standard to maintain the high quality

product they provide.

Market development allows the company to explore New Geographical Markets. From the previous

analysis, the political issue will be the key that Rolls-Royce need to overcome. There are many

markets that Rolls-Royce can enter and provide aftermarket services for the local airline. Knowing

and understanding the regulations will be the first step that the company needs to take. Then, they

24


will need to communicate and invest in developing the new market, and try to smoothen the

political issue, provide maintenance and other services to the airlines. Like companies, they want to

enter the Chinese market, and they will first start up the business in Hong Kong as a stepping stone

to enter the Chinese market.

Product development will be one of the growth strategies of the company, where Rolls-Royce will be

aiming to introduce new products in existing markets. This strategy will be suitable to the company

as the aero engines market need to be differentiated in order to remain competitive. The company

can emphasize on R&D and innovation; secondly, they need to understand what the customers

need. An aeroplane will need many systems implemented in order to work, especially the system to

record the flight and the power system. Rolls-Royce can invest in creating a Flight Record System to

attract more customers.

2.2.2 Internal strategies

2.2.2.1 Value chain

Figure 10: Value Chain (29) (31)

Primary activities

Inbound logistics

Rolls-Royce handle the materials with extra, they have details highlighting the process of handling materials/ product and stock control that the employees will need to follow.

Operations Aero engines need a lot of different components to make the final product. Engineers will need to do lots of measurements and to find pieces of materials to fit in the product to become an engine. A team of workers will need to plan and create the engine together

25


Outbound logistics

Engine is a big piece of machine which is not convenient to store in a warehouse. Rolls-Royce will start to make the product when there is an order and they will need to communicate with airplane manufacturer ahead to make sure that they can transport the engine safely to the right place. They will then communicate with the plane manufacturer and help to install the engine of the plane

Marketing and sales

Company provide details of the engine on their website except those for military usage. Companies tend to use personal selling where they will contact their customers individually to promote their new design. However they do expose details to the media when they launch any new technology or design.

Service Installation, repair, training and spares are the main aftermarket services the company provide. This is the area where Rolls-Royce can improve and provide more sophisticated aftermarket services to the customers.

Support activities

Procurement Acquiring resources is essential to the company. The company will examine the supplier and its products before ordering, also they will regularly look for new technology and for production. However, the working pace of the company is very slow and the company will thus need to improve this problem. Technology has been flourishing in recent times and the company will need to move faster in order to more competitive.

Technology development

Rolls-Royce do have a well developed R&D department, where they have sufficiently talented people and materials. However, the company culture is not ideal and the development of the company is thus slowing down. The company should implement schemes to encourage people be more innovative and create new models.

Human resources management

The people are the key to the company, and Retaining Talented People is thus vital. The company can attract many talented people, but the culture of its company is the main factor responsible for the failure to retain these people. The payment and working hours is fair to all the employees, but the working environment cannot fulfil their need and they find it unattractive to work in the company and they will tend to leave the company. To attract more talented people to join their company, they can create a sponsor scheme, which mainly sponsors masters and PhD students for their research projects. These people will need to do relevant projects for the sponsor scheme and the result of the findings can benefit the company. Beside they can set up Reward and Punishment Scheme to encourage people to work more effectively.

Infrastructure It is believed that the company followed all the industry standards to produce all their engines. There were no accidents that occurred as a result of their engines. However, the information management of the company has room for improvement, where there is a new computer system introduced, the company will take a long time to implement to all the computers, which significantly affect the daily operations.

Table 7: Rolls-Royce Value Chain analysis

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2.2.2.2.Resources competencies

Table 8: Marketing Assets (29) (31) (50)

Overall the marketing assets of the company is not bad. Companies do have sufficient amount of

assets to maintain its company’s viability. However, if the company can create their own materials

for their engine and manufacture them by themselves, the company can enjoy a lower cost of

production and encourage innovation and new engine designs.

Marketing Assets

Supply chain assetsThe security of supply is medium as there are risks that the natural resources are not enough for the industry. Besides, suppliers may not provide them with materials in the future. To increase the security of the materials supplied, the company can find and make their own materials for the engine. Not only can these materials be applied to the aero engines, it can also be applied to other business streams such as marine and the power system.

Alliance-based assetsIn recent years, the sharing of new technology and information in the aero engine industry had been changed and it is easier for the company to access new information. Sharing of technology has become more popular in these days, and companies will tend to work together, such as join venture for a particular project.

Internal support assetsRolls-Royce has high technical skills and expertise in production. However, they do not enjoy cost advantages. Also, the information system is not perfect. It can be one of the areas that the company can improve on.

Customer-based AssetsCustomer relationship is fair, Rolls-Royce needs to work on the aftermarket services to retain more of their customers.The reputation has dropped after they exited the IAE and lost in the engine competition for the very first time. Rolls-Royce is one of the three main dominator of the engine industry, with the right strategy implemented, market share will stop decreasing.

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Figure 11: Dynamic marketing capabilities (29) (31)

Marketing sensing capability

Understanding the external environment is essential to the company, especially for a mature company like Rolls-Royce. They need to regularly update the information under the fast changing and rapidly progressing trends of the industry (36). The R&D department of the company is strong and they have a relatively high marketing sensing. However, they lack creative people to design and develop better engines to compete with their major competitors. Therefore, the company should use the resources to hire or cultivate more talented graduates to join the company, and invented more advanced engines.

Learning capability The company refused to work with P&W and chose to exit the IAE, which shows the company is not willing to learn from other companies, nor share the information and research with other companies. The company should learn new know-how tactics from other companies from the same industry and apply in their own designs to gain a long-term competitive advantage.

Targeting and positioning capability

The current target market of Rolls-Royce civil engines is quite small, they can increase the number of target airline to gain more revenue and increase their market share.

Customer relationship management

According to the market assets analysis, the current customer loyalty of Rolls-Royce is weakening, as the company have lost in the xxx competition and they have failed to design an advanced engine to replace the xxx model.

Innovative CapabilityNew product and service development capability

Adaptive CapabilityTargeting and positioning

capabilityCustomer relationship

management

Absorptive CapabilityMarket sensing capability

Learning capability

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New product and services development capability

Product and service development are important elements to the company. Rolls-Royce have advanced technology and sufficient capital to carry out research and development. Hence, they should focus on designing advance engines with lighter but strong materials.

Table 9: Rolls-Royce Dynamic marketing capabilities

2.3 Evaluation and ranking of options2.3.1 Ranking of StrategiesStrategic options

Fit technical competences

Fit with sector know-how

Builds on our known reputation

Reached our ‘contact ceiling’

Build on client need

Higher income

Increased competition

Ranking

Vertical integration

2 2 2 0 2 2 2 12 A

Engine replacement scheme

2 2 2 0 2 2 2 12 A

New geographical markets

0 0 1 2 2 1 2 8 P

Flight record system

2 2 1 0 0 1 2 8 P

Retain talented people strategy

0 0 2 0 1 1 2 6 p

Reward and punishment scheme

0 0 2 0 1 2 2 7 P

2 = favourable; 0 = unfavourable; 1 = uncertain/ irrelevant A = most suitable; P = possible; U = unsuitable

Table 10: Strategies Ranking (29)

From the above ranking, it shows that vertical integration and engine replacement scheme are the

two most suitable strategies that the company should consider and take action.

29


2.3.2 Evaluation - SAFe Criteria On scale of 1-5, 1 being the lowest and 5 being the highest



New geographical markets

Flight record system

Retain talented people strategy

Reward and punishment scheme

SuitabilityDoes the proposed strategy address the key opportunities and threats the organisation?

5 4 3 2 3 3

AcceptabilityDoes the proposed strategy meet the expectations of the stakeholders?

4 5 3 2 4 4

Is the level of risk acceptable?

4 5 2 4 4 5

Is the likely return acceptable?

4 3 3 4 4 4

Will the stakeholder reactions be positive?

5 4 4 3 4 3

FeasibilityWould the proposal strategy work in practice?

4 4 3 3 3 4

Can the strategy be financed?

3 5 2 4 5 5

Do people and their skills exist or can be obtained?

4 5 4 5 3 5

Total of 45 33 35 24 27 30 33Table 11: SAFe Criteria (29) (31)

30


2.4 Choice of strategy Four strategies are chosen after the ranking.


Backward vertical integration will be highly recommended, this strategy can help the company to

enjoy a lower production cost and differentiate its product by using newly created materials. Rolls-

Royce can firstly search for small component and electronic control component manufacturer that

have incentive to merge with them. Then Rolls-Royce can do some research the manufacturers

understand more on their overall performances. Then to write up the documents and reach the

sellers. Arranging meetings for negotiation, discussion of the heads of terms and complete the deals.

While signing the contract Rolls-Royce researchers can start to create new materials for the new

engine design. After developing the new materials and the new engine, the company will need to do

a range of testing and amendments before finalising the design and sent the product to

manufacturer.


The company will need to count up the number of plane that need to change engine. Then predict

the cost of production, selling price and the expected revenue. Meanwhile, the company can

promote their new scheme and to contact customers and arrange the engine replacement. Lastly

the company can take actions and change the engine for their customers. This strategy aims to

retain their customers.

Reward and Punishment scheme

The HR development and the senior should come together and discuss the details for the scheme.

Then the company should implement the strategy for 5 months for testing and evaluate the results

and see if there is any amendments that they nee to make. After all the amendments, the company

can officially implement this strategy and try to encourage the employees to work in a faster pace.

Retain Talented People scheme

Talented people are not willing to stay in the company as they found the job is not challenging nor

attractive. The HR department should understand the employees needs and to come up with

strategy to encourage innovative ideas. Also to offer the non-monetary rewards to fulfil the

employees needs. This strategy aims to retain the talented people.

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3. Implementation 3.1 Gantt Chart

Figure 12: Gantt Chart (see appendix 5 for the enlarged Gantt chart)

The strategy will be divided into three levels, short terms, mid terms and long terms. For the vertical

integration and the reward and punishment scheme will be a long term plan. As these two plan will

need a longer period time to implement. Engine replacement scheme is a mid term plan as it will

depends on the number of flight that need to change the engine, the duration of time will vary from

1.5 years to 2.5 years. Last but not least is the retained talented people scheme. As it believed that it

will be a short term strategy to back up the reward and punishment scheme. This strategy can help

to improve the working culture and to identify the needs of employees. Which the strategy can be

stop once the reward and punishment scheme can maintain a positive working culture in Rolls-

Royce.

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33


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Appendix

Appendix 1: Share price for the past 5 years

The share price of the company drop dramatically from the early 2014 till early this year.

Appendix 2:

The biggest problem is that the company is adopting a slow pace, which will take the company a long time to solve a problem

a. For example, IT Equipment is outdated even if the equipment has just been installed

eg PCs running XP. Until the upgrade to vista in 2014, software access is still poor as

the IT department has a command control attitude that makes innovation in IT or

engineering almost impossible. Senior managers are apparently aware but choose to

ignore the issue and sweep it under the rug.

Appendix 3: PESTEL

Political factor Strong political influence UK government intervention to avoid

potential foreign takeover of Rolls-Royce

Sanction may cost delays and cancellation , for example Russia where they require lots of information

Major receiver of funding from government which puts them in a powerful position

Benefit from a relative stable democratic government

Economic Factor Worldwide recession

o Oil price decreaseo Interest rate fluctuationo Inflation rate

Fierce competition, savvier customers and economic headwinds are adding to pressure to cut cost

Cost of production high Currency risk will affect the import and

export of engines

39


Import and export policies and controlso Open Skies liberalisation

package 2008 allowing any US or EU-based airline to launch scheduled services between the US and EU

Decrease in government spending will lead to less research and developing spending

Subsidies by UK government US tax breaks for Rolls-Royce

Carbon emission under the Kyoto protocol is target for reduction by EU, creating pressures for reduced impact of air travel

Social factor Civil aerospace correlated with trends

in airline sector Airline influence by demand of global

population; Increase number of passengers travelling by air (www.airbus.com: Global Market Forecast)

o Leads to pressure on airports and air traffic management, creating demand for larger aircraft (opportunity)

o Boeing plane order for the coming year has increased by 30% which indicate the aero engine demand will be increasing

Accidents happen eg Malaysia Airlines incident

Outbound Travel Alert affect the number of people travelling eg terrorism

Growth of aviation Demand for aftermarket product +

services increase ie. long-term contract

Technological factors Innovation of new materials and design Advanced technology help to shorten

the time for new inventions Many years of experience and R&D –

forefront for technology IT security Product performance Risk of technological obsolescence,

with long delivery cycles

Legal factor REACH (Registration, Evaluation and

Authorisation of Chemicals) Norms Articles interpretation Employment protection: Health and

Safety important in manufacturing and also in liability for air safety

Environmental standards and legislation eg. Pollution control, emissions reductions and noise abatement

Environmental Factor Geographical location limitation Unstable weather conditions

o Testing delayo Affect operationo Affect he transportation of

materials/ finished products Supply chain performance supply of

raw materials decrease Capability of global resources

40


EU/US law and WTO ruling on competition

Reduction in consumer demand due to concerns regarding climate change

Appendix 4:

Both Civil and Defense aero engine industry are mature and moving on to the decline section. There is a slow growth in this industry, the innovation has not kept pace with competing product. Aero engines are similar, is it hard for company to have new innovate ideas, as inventing new materials for engines is a difficult project which will take lots of time.

Marine is moving towards the mature side, but there are still rooms for the business to improve and gain more market share.

Where Nucluar and power system is in a growing stage, there is a increasing number of competitor. It is important for the company to differenicate it product and services offering from other competitors. The demand for energy is increasing as there are insufficient amount of oil, there is a need to find replacement which can offer stable amount of energy to people.

Industry Life Cycle

Time

Industry Sales

41


Appendix 5: Gantt Chart

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