Business Strategy

Report

N1079

CandNo: 134492

Rolls-Royce Holdings plc

Business Strategy Report Rolls-Royce Holdings plc

CandNo: 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 Contents
EXECUTIVE SUMMARY ................................................................................................................. 2
1.1 PROFILE OF THE INDUSTRY, SECTOR, COMPETITORS , CONSUMERS & COMPANY......................................... 5
1.1.1 The company ................................................................................................................ 5
1.1.2 The trend civil aero engines......................................................................................... 6
1.1.3 Industry key players....................................................................................................... 6
1.1.4 Market share ................................................................................................................ 7
1.2 ORGANIZATIONAL PURPOSE........................................................................................................ 9
1.2.1 Mission......................................................................................................................... 9
1.2.2 Vision ........................................................................................................................... 9
1.2.3 Value statement:........................................................................................................... 9
1.2.4 Mission, Vision and Value statement analysis ............................................................... 10
1.2.5 Financial analysis ........................................................................................................ 11
1.3 EXTERNAL, INTERNAL AND COMPETITIVE ENVIRONMENT .................................................................. 12
1.3.1 External analysis - PESTEL ........................................................................................... 12
1.3.2 External analysis - SWOT ............................................................................................. 13
1.3.3 Internal analysis - SWOT.............................................................................................. 13
1.3.4 Internal analysis VRIN............................................................................................... 15
1.3.5 Competitive environment - Porters 5 forces.................................................................. 15
1.4 BASIC OF COMPETITION & KEY SUCCESS FACTORS .......................................................................... 17
2. STRATEGIC DEVELOPMENT ..................................................................................................... 18
2.1 EXISTING STRATEGY(S ) ............................................................................................................ 18
2.1.1 Business stream level................................................................................................... 20
2.1.2 Corporate level............................................................................................................ 21
2.2 GENERATION OF STRATEGIC OPTIONS .......................................................................................... 23
2.2.1 External strategies ...................................................................................................... 23
2.2.2 Internal strategies ....................................................................................................... 25
2.3 EVALUATION AND RANKING OF OPTIONS ...................................................................................... 29
2.3.1 Ranking of Strategies .................................................................................................. 29
2.3.2 Evaluation - SAFe Criteria............................................................................................. 30
2.4 CHOICE OF STRATEGY.............................................................................................................. 31
3. IMPLEMENTATION ................................................................................................................. 32
3.1 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 Figures
Figure 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-Royces 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
a ppendix 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.
3. Imbalance in the allocation of resources as well as the inability to develop successor out-of-
date engines (1).

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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

Global Commercial Engine

Market Share Trend 2011-2015
CFM GE Aviation (GE) IAE Pratt & Withney (PW) Rolls-Royce PLC (RR) Others

120%

100% 4% 4%
6% 5% 9%
5%
6% 13% 13% 12%
11%
80% 14% 10%
12% 12% 12%
9% 11%
10% 10% 10%
60%
22%
21% 22% 19%
40%
62%

20% 38% 38% 39% 41%

0%
2011 2012 2013 2014 2015

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
companys 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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commercial engine market share trend -

GE, PW & RR 2011 - 2015
GE Aviation (GE) Pratt & Withney (PW) Rolls-Royce PLC (RR) Others

28.50% 26.50% 31.50% 28.35%

39.90%

13.00% 13.00% 12.00%

11.00%
9.55%
18.50% 18.50% 18.50% 17.15%
10.55%

40.00% 40.00% 42.00% 39.00% 42.50%

2011 2012 2013 2014 2015

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 wi th 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 Vision
Their 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
contributions and inspire others to reach the same heights. They have a role in
exploiting individuals and their collective talents.

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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 1105 2766 1700 67 160
tax (m)
Operating 1186 1373 1479 1390 1499
profit (m)
Cost of Sales 8676 9416 11482 10533 10459
(m)
ROCE 21.24% 41.27% 21.10% 1.72% 2.91%
Turnover 11,124 12,161 15,513 13,736 13,725
(m)
Current 1.20 1.33 1.31 1.46 1.48
ration
Inventory 107.74 105.67 105.51 95.92 92.03
turnover
period (m)
Gearing 1.10 0.80 1.11 1.28 1.82
Gearing 2 0.52 0.45 0.53 0.56 0.64
Table 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 didnt help to
generate more profit which means the efficiency of the company is very low. And it didnt recover
much in 2015.

The gearing ration measure the proportion of the companys 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 Economic Factor

Strong political influence (14) Worldwide recession (12) (21)
UK government intervention to avoid Fierce competition, savvier customers
potential foreign takeover of Rolls-Royce and economic headwinds are adding to
Sanction may cost delays and pressure to cut cost (16)
cancellation (57) Cost of production high (34)
Major receiver of funding from Currency risk (34)
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)
Social factor Technological factors
Civil aerospace correlated with trends in Innovation of new materials and design
airline sector (17) Advanced technology help to shorten the
Airline influence by demand of global time for new inventions
population; Increase number of Many years of experience and R&D
passengers travelling by air (2) (3) forefront for technology
Outbound Travel Alert affect the number IT security
of people travelling Product performance
Growth of aviation (7)(9) Risk of technological obsolescence, with
Demand for aftermarket product + long delivery cycles
services increase ie. long-term contract
(28)

Legal factor Environmental 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
Table 2: PESTEL
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)

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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
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 - SWOT

Opportunity
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
Table 3: SWOT - OT
Threat
Economic recession (60)
Government policies compatibilities
(38)
o Import and export controls
o Sensation policy of other
countries
High level of competition
Competitors start to dominate some
of the aero engine model
Risk for supply chain

1.3.3 Internal analysis - SWOT

Strength Weakness
Good relationship with: Brand image decrease due to loss in
o Suppliers & buyers (especially engine competition and failure to
Singapore airline) improve the engine AE3007 model
o European government Working environment is getting worse
Investment in US to smoothen the Culture of the company causes an
political issue associated negative impact, which may
Major player in aero-engines adversely affect the performance of
manufacturing R&D
Business have reach to different parts New CEO could not handle the media
of the world market (24)
High capacity for R&D 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

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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 VRIN

Competency Valuable Rare Inimitable & Exploitable Competitive
Non- by the firm? outcome
substantiate
Relationship Yes Yes No Yes Yes
between
customers
Company Yes No No Yes Yes
name and
reputation
Design/ Yes No No Yes Yes
Product
Product Yes No Yes Yes Yes
expertise
Innovation Yes Yes No Yes Yes
Security of Yes No No No Yes
supply
Supplier Yes Yes No Yes Yes
network and
relationship
Information Yes Yes No Yes Yes
system
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 - Porters 5 forces

Bargaining 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 enhance d 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
Increased referral once a sale has been made

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Bargaining 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 market
Threat 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 travel
Rivalry 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 resources
Table 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 Factors

There 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 companys 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 Porters 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)

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.

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2.1.2 Corporate level

2.1.2.1 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 ene rgy 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 companys total revenue (48). With
the appropriate strategy implemented, civil can again become the star product of the company.

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.

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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-Royces 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
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

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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 Porters 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
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

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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
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.

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[Type text] [Type text] [Type text]

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 Inbound Rolls-Royce handle the materials with extra, they have details
activities logistics 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

Outbound Engine is a big piece of machine which is not convenient to store in a

logistics 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 Company provide details of the engine on their website except those

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and sales 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 Procurement Acquiring resources is essential to the company. The company will
activities 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 Rolls-Royce do have a well developed R&D department, where they

development 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 The people are the key to the company, and Retaining Talented
resources People is thus vital. The company can attract many talented people,
management 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

Customer-based Assets Internal support assets

Customer 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.
Rolls-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.

Marketing
Supply chain assets
Assets
Alliance-based assets
The security of supply is medium as there
In recent years, the sharing of new
are risks that the natural resources are not
technology and information in the aero
enough for the industry. Besides, suppliers
engine industry had been changed and it
may not provide them with materials in
is easier for the company to access new
the future. To increase the security of the
information. Sharing of technology has
materials supplied, the company can find
become more popular in these days, and
and make their own materials for the
companies will tend to work together,
engine. Not only can these materials be
such as join venture for a particular
applied to the aero engines, it can also be
project.
applied to other business streams such as
marine and the power system.

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 companys 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.

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Absorptive Capability
Market sensing capability
Learning capability

Adaptive Capability
Targeting and positioning
capability
Customer relationship
management
Innovative Capability
New product and service
development capability

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

Marketing sensing Understanding the external environment is essential to the company,

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

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

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[Type text] [Type text] [Type text]

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

Table 9: Rolls-Royce Dynamic marketing capabilities

2.3 Evaluation and ranking of options

2.3.1 Ranking of Strategies

Strategic Fit technical Fit with Builds on Reached Build on Higher Increased Ranking
options competences sector our known our client income competition
know- reputation contact need
how ceiling

Vertical 2 2 2 0 2 2 2 12 A
integration
Engine 2 2 2 0 2 2 2 12 A
replacement
scheme
New 0 0 1 2 2 1 2 8P
geographical
markets
Flight record 2 2 1 0 0 1 2 8P
system
Retain 0 0 2 0 1 1 2 6p
talented
people
strategy
Reward and 0 0 2 0 1 2 2 7P
punishment
scheme
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.

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2.3.2 Evaluation - SAFe Criteria

On scale of 1-5, 1 Vertical Engine New Flight Retain Reward and
being the lowest and 5 integration replacement geographical record talented punishment
being the highest scheme markets system people scheme
strategy
Suitability
Does the proposed 5 4 3 2 3 3
strategy address the
key opportunities and
threats the
organisation?
Acceptability
Does the proposed 4 5 3 2 4 4
strategy meet the
expectations of the
stakeholders?
Is the level of risk 4 5 2 4 4 5
acceptable?
Is the likely return 4 3 3 4 4 4
acceptable?
Will the stakeholder 5 4 4 3 4 3
reactions be positive?
Feasibility
Would the proposal 4 4 3 3 3 4
strategy work in
practice?
Can the strategy be 3 5 2 4 5 5
financed?
Do people and their 4 5 4 5 3 5
skills exist or can be
obtained?
Total of 45 33 35 24 27 30 33
Table 11: SAFe Criteria (29) (31)

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[Type text] [Type text] [Type text]

2.4 Choice of strategy

Four strategies are chosen after the ranking.

Vertical integration

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.

Engine replacement scheme

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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Business Strategy Report Rolls-Royce Holdings plc
CandNo: 134492

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 Economic Factor

Strong political influence Worldwide recession
UK government intervention to avoid o Oil price decrease
potential foreign takeover of Rolls- o Interest rate fluctuation
Royce o Inflation rate
Sanction may cost delays and Fierce competition, savvier customers
cancellation , for example Russia where and economic headwinds are adding to
they require lots of information pressure to cut cost
Major receiver of funding from Cost of production high
government which puts them in a Currency risk will affect the import and
powerful position export of engines
Benefit from a relative stable

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[Type text] [Type text] [Type text]

democratic government
Import and export policies and controls
o 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 Technological factors
Civil aerospace correlated with trends Innovation of new materials and design
in airline sector Advanced technology help to shorten
Airline influence by demand of global the time for new inventions
population; Increase number of Many years of experience and R&D
passengers travelling by air forefront for technology
(www.airbus.com: Global Market IT security
Forecast) Product performance
o Leads to pressure on airports Risk of technological obsolescence,
and air traffic management, with long delivery cycles
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

Legal factor Environmental 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
Geographical location limitation
Unstable weather conditions
o Testing delay
o Affect operation
o Affect he transportation of
materials/ finished products
Supply chain performance supply of
raw materials decrease
Capability of global resources

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Business Strategy Report Rolls-Royce Holdings plc
CandNo: 134492

EU/US law and WTO ruling on Reduction in consumer demand due to

competition concerns regarding climate change

Appendix 4:

Industry Life Cycle

Industry Sales

Time
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.

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[Type text] [Type text] [Type text]

Appendix 5: Gantt Chart

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