无限论文：Business Environment and Strategic Management
无限论文：商业环境与策略管理 WORD COUNT (including titles): 3295 Table of Contents Table of Contents ....................................................................................................................................................2 1. Introduction.....................................................................................................................................................4 1.1 Rolls Royce plc .........................................................................................................................................4 1.2. Civil aerospace-industry definition...............................................................................................................4 2.0 External Analysis of the civil aerospace industry ...............................................................................................4 2.1. Analysis of the Macro-Environment..............................................................................................................4 2.2. Analysis of the Micro-Environment...............................................................................................................6 2.3. Opportunities and threats facing the civil aviation industry .........................................................................6 3. Internal Analysis of Rolls Royce plc, Civil Aerospace division...........................................................................7 3.1. Value chain analysis of civil aerospace at Rolls Royce plc .............................................................................7 3.2. The Resource Based View and civil aerospace at Rolls Royce plc .................................................................8 3.3. Dynamic Capabilities and civil aerospace at Rolls Royce plc.........................................................................8 3.4. Strengths and weaknesses facing civil aerospace at Rolls Royce plc ............................................................9 3.5. SWOT Analysis summary table ....................................................................................................................10 3.6. Internal and external analysis: key issues ...................................................................................................10 3.7. Note of caution regarding internal and external analysis ...........................................................................11 4. Evaluation of possible future strategies for the company .............................................................................11 4.1. The acquisition of an aircraft manufacturer................................................................................................11 4.2. The acquisition of a competitor ..................................................................................................................12 4.3. Alternative strategy for civil aerospace at Rolls Royce ...............................................................................12 5. Implementation of strategic change ..............................................................................................................13 5.1. Benefits of a strategic alliance with either Boeing or Airbus ......................................................................13 2| Page 5.2. Problems and solutions to implementation................................................................................................14 6. Conclusion .....................................................................................................................................................14 7. Appendices ....................................................................................................................................................16 7.1. PESTEL Analysis of the civil aerospace industry ..........................................................................................16 7.2. Five Forces Analysis of the civil aerospace industry....................................................................................20 7.3. Value chain analysis of Rolls Royce plc: Civil Aviation Division ...................................................................24 References.............................................................................................................................................................25 3| Page 1. Introduction 1.1 Rolls Royce plc Post privatisation in 1987 Rolls Royce complemented their portfolio of products and expertise through a series of sales and acquisitions to adapt to new, emerging markets. They now operate four distinct strategic business units (SBU) which are civil and defence aerospace, energy and marine, each catering to distinct, specialist global and local markets (Datamonitor, 2009). In 2009 civil aerospace accounted for ￡4.4Bn and defence for ￡2Bn of underlying revenues. Marine accounted for ￡2.6Bn, whilst energy accounted for ￡1.03Bn (Datamonitor: Rolls-Royce Group plc, 2009; Rolls-Royce plc Annual Report 2009, 2010). They supply engines to over 600 commercial airlines, over 4000 corporate and utility operators and currently have over 12,000 large civil aircraft engines in service (Datamonitor, 2009) with around 35% of the market for jet engine manufacture (Uk Aerospace: Spanning the Globe, 2008). 1.2. Civil aerospace-industry definition Civil aerospace supplies engine technology, servicing and support to commercial airlines, private jet and helicopter manufacturers. The industry is dominated by three main engine suppliers which are Rolls Royce, General Electric and Pratt and Witney (Datamonitor: Rolls-Royce Group plc, 2009). It is extremely competitive and dominated by two main airline manufacturers, Boeing and Airbus. Each manufacturer strives to be the engine of choice for new and existing aircraft as not only do new sales account for huge revenues, but also the servicing contracts that accompany engine sales provide lucrative future income ('Britains Lonely High-Flier,' 2009). 2.0 External Analysis of the civil aerospace industry 2.1. Analysis of the Macro-Environment PESTEL Analysis A full PESTEL analysis can be found in the appendix (7.1) with an explanation of PESTEL analysis with critiques and alternative frameworks for macro-environmental analysis. 4| Page Economic Economic factors impact all industries and due to the economic downturn there is a great deal of factors making it difficult for business. This is especially applicable to the airline industry as not only has there been a vast reduction in consumer and business expenditure on items such as air travel, but also increasing constraints make operation very difficult. Taxes, fuel costs and falling business expenditure which is a key revenue source to the airlines, combined with greater competition and falling passenger numbers is making it very difficult for airlines to operate. This translates into fleet reduction and order cancellations thus affecting the civil aerospace industry in the long term. Political Taxes directly affect the airline industry, as do environmental limits on pollution and the control of airport expansion and growth. These can all directly impact the long term future of the civil aerospace industry. Governments are currently facing the need to raise taxes to both individuals and businesses and this is directly impacting the availability of cash both have to spend on air travel or investment in new aircraft. Governments throughout the world have been forced to financially support some of the world’s largest organisations recently and this has created a strong distrust of many organisations. This has severely hit one of the aerospace industries main form of revenue. Firstly it has limited expenditure on business travel, also it has made the case for owning a private business jet extremely difficult to justify in the eyes of both the public and shareholders. Social All of the factors mentioned above, as well as the factors affection technological/ environmental can have an effect on social trends towards air travel. From a government perspective pressure on sensible, ethical travel is making many reassess their need for air travel, whilst increased taxes on air travel combined with the economic downturns impact on consumer spending is reducing the number of people seeing air travel as a necessary item of expenditure if avoidable. 5| Page Summary Overall the situation for the airlines is extremely geared towards survival currently and this necessity for cost-cutting ultimately means that in the coming years it may be the civil aerospace industry that begins to feel the impact of the economic downturn due to order cancellations and fleet downsizing. 2.2. Analysis of the Micro-Environment Porter’s Five Forces Analysis (1979) Below are the findings from the Five Forces analysis regarding the civil aerospace industry. An explanation of Five Forces analysis, criticisms, updated uses and alternatives can be found in the appendix (7.2). Results of the five forces analysis Civil aerospace is extremely vulnerable to the threat of substitutes with competitive rivalry being extremely high. Dominated by a small number of leading manufacturers, their determination to achieve new contracts with both aircraft manufacturers and airlines places a great threat on industry players to maintain their investment in new technology and development whilst maintaining strong collaboration. . Given the high competitive rivalry, the technical experience and financial investment required to succeed in the jet engine manufacturing industry the threat of entry is low. Supplier and buyer power is medium to low although buyers are ultimately limited to a few select engine models once these have been certified by the aircraft manufacturers as options for their aircraft design. If this approval is not achieved the loss of earnings from sales and servicing would be huge. 2.3. Opportunities and threats facing the civil aviation industry Opportunities The opportunity to develop closer relationships with aircraft manufacturers has the potential to provide sustainable revenue whilst the brand association with either Boeing or Airbus would be extremely beneficial to future sales. 6| Page Threats As mentioned earlier the threat of substitutes is high with extremely high level of competition. The aerospace industry as a whole is extremely reliant on not only the economic factors affecting the manufacturing sector, also on the economic state of the airline industry. Currently many airlines are facing difficulty given the economic downturn leading to drastic cost-cutting for survival often new aircraft orders are the first area of planned expenditure to be reconsidered (Market Outlook, 2009). Government regulation, green agenda, social and business attitudes towards air travel are also key factors that have the potential to greatly affect the future of global air travel and ultimately the civil aerospace industry. 3. Internal Analysis of Rolls Royce plc, Civil Aerospace division 3.1. Value chain analysis of civil aerospace at Rolls Royce plc Value chain analysis (Porter, 1985) provides a way of identifying the value added through an organisations activities compared to the cost of production (Campbell, 2002). It comprises primary and secondary activities and primary activities directly add value to the end product whilst secondary activities indirectly add value such as through experience and technical knowhow. It is extremely applicable to the manufacturing industry, however can be difficult to apply to services industries, although adaptations have been made to utilise the model (Makkar, Gabriel & Tripathi, 2008). This core internal value adding resources at Rolls Royce have been developed over many decades allowing for the streamlining of inputs and outputs to best suit the customer needs. This is enhanced by their secondary activities that although not physical resources, still add great value to the core resources to constantly assess and improve the internal procedures. A value chain can be found in the appendix (7.3). Rolls Royce strictly controls their supply chain with long term partnerships developing that benefit both parties (Rolls Royce, 2010). They also have vast experience in marketing, sales and outbound logistics that allow them to adapt to the clients needs whilst still meeting the strict requirements to gain certification from the engine manufacturers. 7| Page 3.2. The Resource Based View and civil aerospace at Rolls Royce plc The Resource Based View (RBV) (Barney, 1991) assesses key resources that a firm may possess to gain or sustain competitive advantage. It specifies that internal resources are more important to an organisations success than external factors, with physical, human and organisational resources being the three main categories of internal resources (David, 2007a). The main limitation to the RBV is its lack of specificity to a valid outcome that can me used by analysis as the model identifies key resources that can give competitive advantage, yet gives little indication to why these are important and how they can be managed (Priem & Butler, 2001; Johnson, 2008b). These limitations have lead to the development of other frameworks such as the dynamic capabilities view (Teece, 1994). Tangible and intangible resources according to the RBV have to be valuable, rare, inimitable and non- substitutable (VRIN) (Lockett, Thompson & Morgenstern, 2009) and it is clear that Rolls Royce plc possesses many of these traits in civil aerospace. Rolls Royce has many tangible resources giving its civil aerospace division competitive advantage. The technology, manufacturing skills, research and development and the human knowledge capital that they possess all combine within the setting of an extremely successful, well known, trusted organisation to create key resources that simply cannot be copied. Intangible resources that give Rolls Royce competitive advantage revolve around their skills and experience in technology, innovation and collaboration with suppliers, airlines and aircraft manufactures, whilst the leadership helps to bring all of these together to complement the tangible resources. 3.3. Dynamic Capabilities and civil aerospace at Rolls Royce plc Teece and Pisano (1994) developed the dynamic capabilities view that again like the RBV aims to identify key assets and methods used for wealth creation, although focusing much more on “the firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly 8| Page changing environments” (David J. Teece, 1997). It is less static than the RBV and capable of acknowledging change in the external environment (Easterby-Smith, Lyles & Peteraf, 2009). Although civil aerospace at Rolls Royce does have many static tangible and intangible resources, they also have many dynamic capabilities that allow them to constantly adapt and improve their performance to further increase the VRIN factors. Their experience in engineering and innovation, sales and marketing and ultimately the organisational architecture allow Rolls Royce to take their resources and constantly adapt and improve these to suit the external environment. Relationships and reputation makes it extremely difficult to successfully replicate the capabilities of Rolls Royce as this is strongly determined by internal factors such as leadership, knowledge management and experience that simply cannot be copied due to the complex inner workings. 3.4. Strengths and weaknesses facing civil aerospace at Rolls Royce plc Strengths Civil aerospace at Rolls Royce has the experience and reputation to continuously attract new business, whilst their global brand image places them at the forefront of engine design and the first port of call for aircraft manufacturers looking to collaborate. This collaboration and after sales servicing with both airlines and airframe manufactures means that they can achieve long term financial stability whilst still seeking to achieve new orders and use their position to invest in new technology, further strengthening collaborations and partnerships. Weaknesses Their reliance on the airline and aircraft industry makes Rolls Royce extremely dependant on the success of both as they can only supply engines as and when the aircraft manufacturers are ready for them and this industry is often prone to long delays. The current economic crisis is making many airlines rethink new orders and reconsider underperforming routes further increasing the pressure on Rolls Royce. 9| Page 3.5. SWOT Analysis summary table Strengths Weaknesses Experience and market leader Brand image, respect and loyal customer base Financial position and long term order base Close partnerships with leading airframe manufactures Extremely reliant on the success of the airline industry. Very confined to the pace of the airframe manufactures Opportunities Threats Closer alliances with airlines and airframe manufacturers Prolonged growth and servicing contracts Increased value order book Competitors and new entrants to the market Losing technological superiority Long-term economic issues combined with a push towards greener travel Government regulations 3.6. Internal and external analysis: key issues Below are three key issues identified from the external and internal analysis of Civil Aerospace at Rolls Royce. 1. Their reliance on the success/ economic position of the airframe and airline industry. 2. Government regulations, emissions, taxes and a move away from unnecessary air travel. 3. Intense competitive rivalry and threat of substitutes. 10 | Page 3.7. Note of caution regarding internal and external analysis Any recommendations or findings from this report are only relevant based on the current external and internal environment of the civil aerospace industry. Within a few years, if not months both the external and internal factors will of changed meaning that analysis should be re-conducted. 4. Evaluation of possible future strategies for the company 4.1. The acquisition of an aircraft manufacturer As mentioned earlier in this report Airbus and Boeing dominate almost 100% of the market for large aircraft manufacture. Boeing had a revenue of $61Bn and an order backlog of $352Bn in 2008 (Boeing Annual Report 2008, 2009) whereas Airbus had a revenue of €27.5Bn and an order backlog of €355Bn (Airbus Annual Report 2008, 2009). Comparing this to Rolls Royce plc which had a revenue of ￡9Bn and order book value of ￡55Bn in 2008 (Rolls-Royce plc Annual Report 2008) it is clear to see that even regardless of the differing currencies for each companies results Rolls Royce is significantly smaller than the two key aircraft manufacturers therefore financially acquisition would most likely be impossible considering the size of investment and capital needed. Even if it was financially possible to acquire one of these companies, due to the close ties they have with the countries supporting them it would be impossible as they are extremely dependant on state loans and funding. Both Boeing and Airbus have criticised each other greatly over aid packages from governments around the world ('Airbus wants UK aid deal to follow France and Germany,' 2009) It would certainly not be feasible to acquire an aircraft manufacturer as the financially viable acquisitions would not provide a significant market share and would damage their excellent, existing partnership with both Boeing and Airbus. Neither would it be worth pursuing the acquisition of another aircraft manufacturer as the market is so well established that it would be almost impossible to penetrate. If this was attempted both Boeing and Airbus would certainly reconsider their close allegiances that they have with Rolls Royce. 11 | Page This strategy would be related diversification and forward integration allowing for greater control over distributors whilst adding new, however related products and services to their existing product portfolio (David, 2007b). 4.2. The acquisition of a competitor The main competitors of Rolls Royce are General Electric and Pratt and Whitney although many other engineering companies including Hampson Industries, Honeywell International and BAE Systems are also key competitors (Datamonitor: Rolls-Royce Group plc, 2009). These competitors all offer highly specialised products and technologies especially in aerospace and defense and many have used their technical experience in one area to enter a new market with aerospace and military being the founding technologies of most. This makes it very difficult to select a competitor to acquire whilst avoiding crossover of non-essential resources and services. Also many are larger or of similar size to Rolls Royce making it financially difficult to do so. Although possible to integrate two large engineering organisations, there is a strong risk that as these organisations are so specialised that any attempt to integrate one firm with another could fail, simply because the technology and expertise are so specific to one organisation that it becomes extremely difficult to implement a generic format of management and procedure. Competitor acquisition would be horizontal integration with both related and unrelated diversification possible depending on the competitor being acquired (David, 2007b). 4.3. Alternative strategy for civil aerospace at Rolls Royce Within both civil and military aerospace the opportunity to develop even closer relationships with both Boeing and Airbus would be an excellent move. Currently Rolls Royce is the number one supplier to these two companies; however other engines are often certified. The ideal situation for Rolls Royce in the current operating environment would be to develop a strategic alliance to be the number one engine supplier to these organisations. There is enough room within the current industry and markets to pursue growth and development. This is especially possible in the emerging business units of marine and energy with their expertise in 12 | Page nuclear offering the possibility of vast growth as and when governments around the world finalise their plans to build new nuclear power stations. Not only would a strategic alliance allow both parties to pursue the same goal, but it would also allow them to retain their own organisational control whilst still pursuing alternative ventures. Also as it would not be a formal merger there would be no real barriers to formation especially as many governments back Boeing or Airbus due to their size and importance (Johnson, 2008c). This strategy would allow for greater distributor control through forward integration ultimately leading to market penetration/ development whilst allowing for product development through closer collaboration with the airframe manufacturer (David, 2007b). 5. Implementation of strategic change 5.1. Benefits of a strategic alliance with either Boeing or Airbus The formation of a strategic alliance between civil aerospace with either Airbus or Boeing would offer unlimited opportunities for growth, whilst still allowing Rolls Royce to pursue alternative ventures. Having existing, excellent relationships with both aircraft manufacturers there is certainly the scope for even closer collaboration as this would benefit each party greatly. It would allow both specifically tailoring designs much closer to the desired outcome, building the brand image of both parties and also leaving room for further collaboration. Civil aerospace would certainly not be the only SBU to benefit at Rolls Royce, obviously being the number one engine supplier to either Airbus or Boeing would hugely benefit their brand image, but it would also allow Rolls Royce to integrate many of the skills and technology present in their other business units with complementary ones within the partner of the strategic alliance. Financially there would be great benefit to both companies, it could reduce the need for reworking/ redesign by involving both parties from the beginning of each new project. It could also allow for competitive advantage through excellent communication between both companies allowing them to expand their existing client base. 13 | Page From the perspective of a shareholder the risks would be minimal and there would be no need for rights issues that often dilute the power of the existing shareholders. 5.2. Problems and solutions to implementation The main issue regarding the formation of a strategic alliance with either Airbus or Boeing would be the bias created towards the excluded part as they are both extremely competitive this could create barriers to business with the competitor. Also there is the risk of becoming over focused reliant on the airframe manufacturer. To avoid this scenario of over reliance on one SBU with one aircraft manufacturer Rolls Royce could build an extremely close relationship with either Airbus or Boeing, yet still actively and visibly pursue alternative projects so that they still strive to cater to other aircraft manufacturers. Ideally it would be possible to form strategic alliances with both Boeing and Airbus, however this could overcomplicate design and cause Rolls Royce to loose their own decision making process. This relationship would also put great pressure on Rolls Royce to maintain their technological superiority to prevent the strategic alliance failing although this probably would not be a problem as they have vast experience in the jet engine industry which would be further enhanced by the strategic alliance. By securing a long lasting relationship in jet engine manufacture with the help of a brand bolstering partnership from either Boeing or Airbus they could use the increased revenue from new sales and continued servicing to pursue new ventures and continue to build on their recent successes in energy and marine. Military aerospace would certainly benefit from this strategic alliance also as both Boeing and Airbus also operates military and defense aerospace divisions too. 6. Conclusion Rolls Royce plc is a very successful organisation with a steady financial future given the nature of product orders and backlogs. They are in an excellent position within the aerospace industry with plenty of room for future growth and development, whilst their marine and energy divisions are emerging as leaders in these new industries thanks to Rolls Royce’s brand image and vast expertise in engineering. I would encourage investment in Rolls Royce although their share price has doubled in the 14 | Page last year meaning that currently it may be stabilizing, however the future does look stable, especially due to the emergence of their upcoming business units (Yahoo Finance, 2010). (Yahoo Finance, 2010) 15 | Page 7. Appendices 7.1. PESTEL Analysis of the civil aerospace industry The PESTEL framework allows for external industry analysis of factors that may have an effect on the success or failure of particular strategies (Johnson, 2008a). The factors it analyses are political, economic, social, technological, environmental and legal. Each individual factor is investigated for its effect on the industry under analysis and then the results are ranked in order of impact with irrelevant factors being excluded. Although extremely valued as a framework for external industry analysis, limitations to PESTEL do exist; these often revolve around its lack of direct focus upon the industry under analysis. Alternative frameworks also exist for external macro-industry analysis such as the SWOT analysis. Economic Economic factors have the potential to affect every one of the other categories below, making the economic situation extremely important to the civil aerospace industry. Cost-cutting and planned investment are both areas high on the agenda of many organisations currently, especially within the airline industry thus affecting expenditure into the civil aerospace industry greatly. Orders can often be cancelled through no fault of the civil aerospace industry, for example many orders have been reviewed or cancelled due to the delays with the Airbus A380, something that many of the engine suppliers have no control over or simply due to worsening economic conditions affecting carriers (Davis, 2009). Fuel Pricing The success of many civil aviation organisations is extremely dependant on fuel prices, with many hedging at fixed prices with the aim of achieving a lower price than forecasted in the coming months/years (Wall & Flottau, 2009) and this forecasting is often greatly inaccurate and noted to be used to preserve profit forecasts, not achieve the best price for fuel (Morrell & Swan, 2006). This failure to purchase fuel at the lowest price can often lead to large losses for the airlines and this ultimately reduces the financial potential for the purchase and expansion by replacing and growing their existing fleet. 16 | Page Civilian travel and expenditure Falling customers is a trend being faced by most airlines currently, especially due to the increased financial burden placed on many affected by the financial downturn. Yearly reports published by Air Transport World (2009; 2010) have shown falling passenger numbers across global markets in both 2008 and 2009 demonstrating how severe the economic downturn may prove to be on the civil aerospace industry in years to come. Organisational expenditure Business class travel is one of the most vital areas to many large long-haul carriers and over the past few years it has dropped dramatically with suggestions that it may never return to previous levels (Karp, 2009) although a report by Egenica (2009) recently outlined their predictions for a growth in business travel by air to European destinations in 2010 although there is a much greater emphasis on accurate business travel expenditure. Private/ business aircraft The supply of engines to both individuals and organisations with private aircraft makes up a large proportion of the top three organisations sales and service within this industry and now as many organisations can no longer have private jets this has the potential to affect continuing sales and servicing. Even if an organisation can afford a private jet, it is viewed extremely badly in the publics eyes and although sales had dramatically increased up to 2007, there are suggestions that there will be a sharp fall in coming years (Starry & Bernstein, 2008). Currently many with existing orders are cancelling and unloading their existing jets to rebuild public trust in many large corporations (Matlack, 2009). Political The political decisions, agenda and aims of an individual country or coalition of countries can have great impact on the civil aerospace industry. Governments have the power to control many factors affecting the success, survival and growth of both the civilian airlines and private jets usage and this can have great long term effects on the civil aerospace industry. 17 | Page Emissions targets Many countries are signing up to global emissions cutting schemes and many of these include the airline industry. From 2011/12 European aviation will be included meaning that carbon dioxide emissions from all flights leaving the European Union will have to be offset (Vespermann & Wald, 2010). This is expected to have a small impact on the aviation industry, however in the long term it is expected to place more pressure on technological improvements, something that the civil aerospace industry will be a factor in providing (Anger, 2010). Airport and route expansion The controlling government can have a huge impact on the future of civil aviation. For example in the UK Labour is in favour of the new runway at Heathrow airport, whereas The Conservatives apposes it claiming that competition can be increased by removing monopoly power within the industry. Obviously not immediately relevant to the civil aerospace industry but this just highlights how much control a government can have over an industry as large as aviation (Rogers & Bloomfield, 2009). Taxes Taxes can greatly affect not only the core business through generic taxes on businesses, but also specifically the aviation industry through taxes such as tourism and fuel and this drastic taxing on the airline industry on both a passenger and business level is certainly not helping the financial position of many organisations who are key customers to many civil aerospace manufacturers. The add on taxes specifically to the airlines have been found to affect short-haul low-cost carriers the most and are passed onto passengers to offset the cost, inevitably driving up the cost of air travel and reducing revenue (Karlsson, Odoni & Yamanaka, 2004) Tax rises have also been proposed for the purchase of private jets with the European commission debating a standard VAT implementation on all private jet purchases over 8000kg (Roberts, 2009) Business expenditure Governments throughout the world have recently felt the pressure to rein in excessive business expenditure such as first class business travel and private jets in many of the largest multi-national organisations. This has created a backlash of public anger against organisations seen to be clearly abusing their power and shareholder funds. This has occurred both in the public, private and 18 | Page government sectors and has put direct pressure on the expenditure of organisations that are profitable and received no help from governments during the financial crisis. The majority of airlines that cater for business travel tend to be the larger, more successful airlines and it is these that normally purchase new airlines providing the opportunity for new jet engine contracts to be signed. As the move is continuing towards cheaper air travel and a move away from premium service, airlines are going to continue to operate on smaller and smaller profit margins severely limiting their options to purchase brand new aircraft or maintain excessive fleet numbers given the high cost of servicing and maintenance. Social Social trends as mentioned earlier can greatly affect the airline industry and ultimately the aerospace industry. As the environmental issues associated with air travel are realised by more people with the help of government initiatives to reduce unnecessary air travel there is a strong risk that travel by air is once again going to become more of a option of necessity instead of the current low cost, short flights that offer alternatives to emerging cleaner, potentially cheaper, possibly more convenient forms of transport. This is not helped currently by falling consumer expenditure on non-vital items such as holidays and air travel as many airlines simply are not in a financial position to weather out social trends in travel, especially when there is strong support for a global reduction in unnecessary air travel and a drive behind green travel such as high speed rail, although for many countries this is a long way off. Technological/ Environmental Environmental issues often build pressure on manufacturers to strive for clearer, more efficient products however currently the economic issues far outweigh environmental issues when being considered by both governments and customers. 19 | Page Key findings Economic Political Fuel Pricing Private/ Business jets Business and consumer expenditure Organisational survival and industry growth Emissions targets Airport/ route expansion Taxes Business expenditure Technological/ Environmental Social Government agenda Technological superiority Consumer spending patterns Travel preferences The majority of the points mentioned have the possibility of having a short term effect on the civil aerospace industry, however if many of these negative factors continue long-term they could severely limit the expenditure into engine purchases with the possibility of fleet reductions again reducing revenue raised from servicing and repair. 7.2. Five Forces Analysis of the civil aerospace industry The five forces framework outlined by Michael Porter (1979) provides a tool for analysing the micro- environment related to the industry providing a more specific analysis that PESTEL regarding factors directly affecting the industry (Johnson, 2008a). It focuses on five key issues that are the threat of entry from new competitors, the power of both buyers and suppliers, the threat of substitutes and competitive rivalry (Porter, 1998). The model has drawn criticism, firstly that it is out of date having being designed over thirty years ago with the main criticisms revolving around the models view of a static organisation not addressing feedback and the organisations actions taken to counteract the external environment such as strategic alliances or partnerships (Faulkner, 2006). Attempts have been made to improve the model to better suit a more modern business environment such as by Grundy (2006) who, recognising the limitations such as an over emphasis on the macro-environment and a disregard for value chains suggests that the 20 | Page model can be combined with other tools to enhance its effectiveness, helping to place more emphasis on the micro-environment too (Grundy, 2006). Threat of entry Many of the most successful organisations operating in the civil aerospace industry have skills and technical experience in similar industries such as automotive, military and marine engineering (Civil Aerospace in the 21st Century, 2006). From the opposite perspective there are many large manufacturing and defence organisations that could hold the knowledge and finance to enter this extremely competitive, highly dominated market although long collaborations with aircraft manufacturers exist making the barriers to successful entry very high. Also the level of technical skill necessary to produce a commercial jet engine would be immense for an organisation with limited experience in the jet engine industry. This leads to the major factor limiting entry which is the financial cost of development, testing and even just producing the end product. Even if these all succeeded the eventual difficulty would be entering an extremely well established market with a new product when established, proven technology currently dominates. Buyer bargaining power As mentioned earlier airlines specify the requirements for their aircraft to the two main manufacturers which are Boeing and Airbus, they account for almost 100% of the aerospace market producing large commercial airliners (MacPherson, 2009) and although the final decision on the type of engine is down to the airlines, only certain engines are certified for use alongside the industry leading planes that these two companies produce (Uk Aerospace: Spanning the Globe, 2008). This ultimately involves extremely close collaboration with either Boeing or Airbus to meet their requirements they have when designing new planes and then they select from engine prototypes from various manufacturers and the airline, the end customer is offered a selection of a limited number of models, although often only one is certified. This allows buyer power to be distinguished into two components, first being the power of the two leading airline manufactures Boeing and Airbus have over specifying requirements of the jet engines, manufacturing and supply time etc often leading to tight partnerships developing once the desired engine is selected for a particular model. The second and ultimate buyer, the airline has less financial power over the suppliers as there is no real shortage of buyers, especially when the engine choices are often so limited on jet aircraft that they 21 | Page have to go with one model of engine due to the technical specification and close specificity to the aircraft being purchased. Obviously there will be negotiation possible in terms of prices paid for the up front product and then servicing, however it has been suggested that some aerospace manufacturers sell their jet engines at a loss to develop long lasting, highly lucrative servicing agreements with the airlines. As many of the jet engine manufacturers have order books that run into many billions of dollars they are currently not desperate to increase orders by reducing their prices. Supplier bargaining power Supplier power is definitely lower than buyer power, again many suppliers produce extremely specialist, hi-tech parts, but there are a greater number of companies that do this leading to more choice for the purchasing organisation. Many of the jet engine manufacturers are now so large and experienced in their industry that they can greatly reduce their reliance on suppliers and certainly not be left in a position here suppliers wield excessive power over them. Most in recent years have attempted to streamline and reduce their supplier numbers again building lasting relationships with key suppliers to the benefit of both parties. Threat of substitutes On the commercial side of aviation the threat of substitutes is relatively low in number terms, however there are a few key companies capable of meeting the highest specifications set by the two key aircraft manufacturers. These companies can produce products that have little difference in end performance and this is displayed by the fact that many of the leading jet airliners offer engine choices from different key industry players. As there are a number of key players producing jet engines it could be assumed that the threat of substitutes is relatively high, this could be considered the case but due to the strong relationships between aircraft and engine manufacturers it is a much more likely situation that substitutes will not be needed as engine manufacturers specifically make sure that their engine is completely suitable to the jet in question. For smaller jets the threat of substitutes increases in terms of number of potions, however again there are products and suppliers that are well established as the key suppliers and these have worked with aircraft manufactures for numerous decades. 22 | Page Like many industries there is always the threat of substitutes, but with an industry so driven by high, safe, reliable performance these options are often not valid given the reputation and relationships that many jet engines have developed and are extremely keen to hold onto. Competitive rivalry Rivalry is extremely high within the civil aerospace, especially amongst the main players who dominate the supply of jet engines to Boeing and Airbus. Their relationships and alliances with these key manufacturers are greatly values and ultimately defended and this is furthermore enhanced due to the relatively low threat of substitutes. Collaboration is extremely important within the airline industry and this makes the initial competition for contracts and partnerships extremely fierce. Once this partnership is established there is a relatively small chance that manufactures will be changed given the nature of engine design and importance to the aircraft manufactures. This makes the technological competition great as each company wants to be in a position to offer a superior model to the aircraft manufacturers as and when they request design proposals for new aircraft. 23 | Page 7.3. Value chain analysis of Rolls Royce plc: Civil Aviation Division References (2009) Air Transport World, 46 (12), pp. 1-1. (2010) Air Transport World, 47 (4), pp. 1-1. Airbus Annual Report 2008. (2009) Paris: EADS [Online]. Available at: http://www.reports.eads.com/2008/en/book1/6/3/2.html (Accessed: 28/04/2010). 'Airbus wants UK aid deal to follow France and Germany', (2009) Professional Engineering, 22 (11), pp. 18-18. Anger, A. 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