5 forces of Porter Rolls Royce

For this case I will use the company Rolls Royce. Not the one which build cars but the historic one which create motors for aviation, marine or energetic solution.

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First let’s have a presentation of this company:

Rolls Royce was founded by two men in 1906 in England, Henry Royce and Charles Rolls. They were producing motors for planes. The important thing we have to know is their motors were used a lot during the two World War. For example during the first one, half of the allies planes were using Rolls Royce motor. During the second one, many of best planes of US and British army used Rolls Royce motors. They also built many motors for the marine army. After the two World Wars they create a huge program on Aerospatiale. That’s during this time that they start to create cars, famous for their luxury, motors and size. We have to know that many people think Rolls Royce build only cars, because they don’t do many advertising on what they do, so people only see Rolls Royce cars on movies or on the street.

Rolls Royce became public in 1971 and was divided in two in 1973. A branch for cars, a branch for motors (marine and Aerospatiale). In 1987 Rolls Royce plc (marine and Aerospatiale motors) were privatized.

Rolls Royce Motors, the cars division is now own by BMW.

Nowadays, Rolls Royce Plc is the second biggest creator of motors just after General Electric Aircraft Engines. More than 38 000 people are working for this English company. Headquarter is in London and half of their employees are working in England.

Their turnover is around 9 Billion and half of their customers are now in Asia or in Middle East, they evaluate with the market. They tried to diversified their portfolio to win different other market.

Now I will present you what is the 5 forces of Porter (with one in Addition).

Let’s start by a graph of what it is:

The model of the five competitive forces of Porter is a tool for strategic analysis of the competitive environment of a company. The author, M Porter, assume that the “performance” of the company depends on its ability to match with, influence and resist pressures are competitive environment. Indeed, the main objective of a company should be to gain a competitive advantage in its market, which is measured ultimately by its ability to generate profit (performance). This model aims to identify the forces in the competitive environment and their intensities, to adapt its strategy to gain a competitive advantage and thus, achieve above industry average profits.

This tool is particularly interesting but, in its first version, he neglects another force influencing the competitiveness of firms in an industry: the status and role of legislator. Indeed, the model described by Mr. Porter is true that for a given legal framework. In the same industry, firms compete against the other one but their actions must respect the laws defined by each state. That is why the latest books and articles on the subject speak 5 +1 forces Michael Porter. For example, in some industries the number of business may be limited by licenses issued by the state. We can take the example of Free (Illiad Group) who wanted to be the fourth operator in mobile industry in France. But the government in 2007 refused that. They had to wait 5 year and some denunciations of illegal agreements between three of biggest operator.

Other industries must meet safety criteria defined by laws to protect workers or consumers (eg food industry or toys for children).

However, not affect the quality of the analysis, we must not neglect the influence of the state or the legal scope in which the model is being used.

5+1 forces of Porter for Rolls Royce plc Company:

Threat of new Entrants,
In this case, Rolls Royce has no really threat. As we saw just up, the cost of entry is in some industry the most important barrier. For Rolls Royce it’s exactly the case. They are on this market since 100 years. They build a reputation but mainly a huge expertise on this market. If tomorrow someone wants to invest on this production, they will have to pay lot of money to acquire this expertise. The second thing is it’s a finial of the British industry, even the government took some part of this company. So that’s help when a government invest on a company. I’m not sure they will do the same thing for another company today. Some emergent country try to attack the market, I’m thinking about India, “Russia”, or Brazil, but for the moment they can only take advantage by the price and for this kind of investment, motors customers want quality.

Threat of substitute product,
It’s the same thing than up, Rolls Royce are in a capital industry. Today we didn’t find another solution of the motor. So if we really want to find a substitute product, we can take the example of their marine division, sail boat can be a substitute of motor boat. But even this possibility has limits, because most of sail boats have motors and some luxury sail yacht have a Rolls Royce motor. For their Aerospatiale division, there are no substitute product yet. Some studies are thinking about create clean motors, like water motors, Rolls Royce take part of these studies and pay lot of money in research and development to not miss the wind of change. For now they still have some good years with their best seller, the kerosene motor!

Bargaining power of suppliers,
Rolls Royce is pretty on the top of the supplier chain. Even if they always have to buy micro component to build their motors, they have less problems with the bargaining power of suppliers than a company like Boeing or Airbus. I mean Airbus find a solution to fight against this problem because they build their planes with the capacity to accept three different type of motors. Like that if they have problem with one of the three biggest manufacturer, General electric, Rolls Royce or Pratt and Whitney, they can change it with no cost of transformation. We can say that it will be more difficult for Boeing for example. For Rolls Royce, it’s different, it exist many different producer of micro components, so their suppliers don’t really have the power to play on it.

Bargaining power of customers
As I said before it depends of which customers. Rolls Royce is pretty essential when we talk about motor. Even if they are not the only one on the market, they have huge contract with many armies and many civil aviation company. Because they wanted to stay a little bit dominant, Airbus decided to not stay engaged with Rolls Royce by created planes with the possibility to put different type and different brands of motors. So we can say that the first buyer of plane motors has the power to change their supplier. But a motor is the most important piece for a plane so after many hours of engineering on a project of build a new plane, they will not change at the last moment. About negotiation, because we are talking about millions of Euros or pounds, the power of customers is complicate, but for some of them like Airbus, Boeing or big shipbuilders, contract are enormous, and it’s represent a big part of the Rolls Royce turnover, at that moment they can discuss about right price.

Industry Rivalry,
This part is complicate for this industry. It exist many different producers for motors industry, but only three have significant market
They unfortunately are competitors, but for example General Electric did a partnership with Safran, the French company to create some motors for Airbus. Like that they increase they market share in Europe by work with a European company. European often like work with European industry. Safran was the best alliance they could find if they wanted take market share to Rolls Royce. On the other side in 2011, Rolls Royce doesn’t want to work on old plane of Airbus, but they accept to do a partnership with one of their big competitor, Pratt&Whitney. They wanted push Airbus to create another Plane and not use an old with a new motor. That’s a kind of good strategy, like that they create their future customers.

I wanted to put this part on my assignment because I think, now it’s an important force, as before, but before we didn’t take so much attention on it. In that case, British government took the management of Rolls Royce. That example is particularly interesting, because in that case, government mades all the decisions. Nowadays States try to be not really interventionist, but by certain laws, they do interventions. For example by the fact that airlines company have to reduce their CO2 emission, if not they pay huge taxes. Rolls Royce had to adapt their motor to be less gourmand on kerosene. They invest a lot on that. I’m not sure that a new competitor can follow this type of investment.

To conclude, we can say that Rolls Royce has a good place on this industry and they continue to work on it. It’s difficult to see arrive on the market a new competitor which will cut the price and take a lot of market share in 2 years.

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