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无限论文:Business Environment and Strategic Management

无限论文:商业环境与策略管理思路框架整体辅导案例。

  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

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  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

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  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.

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  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.

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  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.

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  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.

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  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

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  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.

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  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.

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  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.

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  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

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  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.

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  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

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  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)

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  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.

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  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.

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  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

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  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.

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  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

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