Rolls Royce Managing Capability

Published Date: 02 Nov 2017

Within this assignment I will be explaining, outlining and assessing the capabilities of Rolls Royce Group PLC. I will also outline the shortcomings of strategy and the benefits. Identification of Rolls Royce Group PLC’s capabilities with regards to their resources. The application of a variety of tools and frameworks, which will be used to evaluate Rolls Royce’s strategic capabilities. Finally the development of management and how it affects the development of the company and its management of capabilities.

2.0 Introduction

Rolls Royce has had a consistent strategy in place for the past 15 years, this has ensured their place within the market and has made them a key player in the 4 areas that the business focuses upon. These being civil aerospace, defence aerospace, marine and energy. Rolls Royce’s organic growth over the past 20 years is down to key partnerships within the industry sector such as Norwegian University of Science and Technology and Marintek. The key focus of partnerships like this "to stimulate research and maintain a strong focus on its application to create a technological lead, thereby maintaining the company’s technology lead." (Rolls Royce Group PLC, 2009) Its forward thinking like this which ensures Rolls Royce’s position in the future.

The development in the commercial aviation industry would not be where it is without Rolls Royce’s input into the industry. More than 3 million people fly on commercial aircraft and each year there are now more than 18 million flights. The answer to these high figures comes down to the stringent standards that are required of airplane technologies. Thus statistically flying in a jet is by far safer than traveling by car, of which the majority are powered by Rolls Royce jet engines. (Rolls-Royce Group PLC, 1999)

Rolls Royce pride themselves on developing the best solutions and delivering them in the most efficient way. With 160 defence customers worldwide, 2000 marine technology customers and also being the world leader in the supply of power and compression equipment, with over 120 energy customers worldwide. along with world class manufacturing facilities in 20 different countries worldwide, this ensures diversification within the company. (Rolls-Royce Group PLC, 2009)

Services now accounts for over half the revenues generated for Rolls-Royce Group PLC, it is an integral part of the companies makeup, this is reinforced by establishing long term partnerships to help deliver to the high demands of the customers. (Rolls-Royce Group PLC, 2009)

Rolls Royce strives to attract and retain the best people globally in order to grow successfully and maintain and increase market position. (Rolls-Royce Group PLC, 2009)

3.0 Part1.

3.1 Capabilities, Strategy, Competitive Advantage and RBV

Strategic capability within a company is concerned with two key areas, these being resources and competences. These capabilities are applied to customers or clients. "Strategy is likely to be expressed in broad statements both about the direction that the organisation should be taking and the types of action required to achieve objectives".(Johnson, Scholes, & Whittington, 2009)

The concept of strategic control "involves monitoring the extent to which the strategy is achieving the objectives" this involves analysing the companies key strategies over a period of time to deem success and how to progress and improve. (Johnson, Scholes, & Whittington, 2009)

The capabilities of an organization "cannot survive if managers do not manage costs efficiently"(Johnson, Scholes, & Whittington, 2009) This is a key area that must be overlooked as unnecessary expenditure or the opposite, not enough funding can cause sectors of any organisation to fail.

The value of strategic capabilities helps to "seek to build competitive advantage" (Johnson, Scholes, & Whittington, 2009) but in order to build on these it must focus upon the "values to its customers" (Johnson, Scholes, & Whittington, 2009)

Organisations that can try to achieve a competitive advantage by preserving its successful strategies over time and much of what is written about competitive strategy takes the need for sustainability as central expectation. (Johnson, Scholes, & Whittington, 2009)

"The resource-based view of strategy: the competitive advantage and superior performance of an organization is explained by the distinctiveness of its capabilities" (Johnson, Scholes, & Whittington, 2009) This means that the companies key resources that they have which make them able to deliver effectively and better than competitors make it have the competitive advantage. This view focuses upon the unique and threshold, tangible and intangible resources available, as well as the threshold & core competences.

3.2Rolls-Royce Group PLC - Competitive Advantage

Within the aerospace divisions of Rolls Royce "To gain a competitive advantage, Rolls-Royce needs to validate the performance of its engines and achieve greater efficiency, particularly in areas such as fuel economy and emissions." (Qinetiq, 2009)

Rolls Royce achieved this competitive advantageduring the mid 1990’’s entered a pricing "competition among the big-three aero engine makers" (Answers.com, 2009) which "had slashed that segment's profitability, Rolls-Royce focused on providing higher-margin parts and service to the world's airlines, hoping to double that business by the turn of the 21st century. Emphasis on sales to Asian airlines paid off handsomely; by the mid-1990s, the company had captured one-third of China's aero engine orders." (Answers.com, 2009)

"Rolls-Royce Group plc announced that it has won an order for Trent 700 engines to power 20 Air China Airbus A330 aircraft. The contract, worth $1.5 billion at list prices, includes long-term TotalCare service support. The aircraft, to be delivered from 2011, will take Air China's Rolls-Royce powered A330 fleet to a total of 43. In China, the Trent 700 has now been selected fourteen times by nine customers to power a total of 178 A330s in service or on order." (Reuters, 2009) Rolls Royce have been steadily expanding into the Asian market sector. Winning many key contracts within the commerical aerospace industry amongst the chinese owned airlines such as air china, mentioned before in the quote from Reuters.

Figure (Nano Web Tech Ltd. , 2009)

As figure 1 shows above us, and previous sections in the introduction of Rolls-Royce Group PLC shows the logical layout of the company, touching upon the exceptional resources available to its employees, investors and partners. With well deliberated strategy and all the other key components shown within the model above. Rolls Royce has been successful in creative a competitive advantage in a relatively close competition market.

3.3Rolls-Royce Group PLC - Capabilities

The Rolls Royce partnership schemes in place such as with universities such as Clemson University, will provide unpresidented funding and resources for the research and development of not only new technologies but also new human resources. "Rolls-Royce has pledged $120,000 to establish a new, multi-year engineering scholarship program at Clemson. The Rolls-Royce Scholarship Program is designed to support undergraduate engineering education and will fund undergraduate scholarships for qualified students majoring in four-year engineering programs." (Rolls-Royce, 2009)

Servicing Scheme - Rolls-Royce Total Care Services Limited provides aftercare support services. "Located close to our customers, they provide spares, service exchange components and the best levels of service. These facilities can handle our largest products and are experienced in overhauling them to tight timescales, often getting involved in the planning long before the vessel docks." Rolls Royce is dedicated towards not only producing top quality products, but also providing the necessary aftercare required of such high demanding products, such as turbojet and fans. (Rolls-Royce, 2009)

3.4 Rolls-Royce Group PLC – Strategy

By following a consistent strategy for the past 20 years, Rolls-Royce Group PLC have grown organically into a well balanced company, allowing the technology and system integration skills to access global growing markets. With all the key people, resources and financial resources readily available to take advantage of these opportunities. (Rolls-Royce Group PLC, 2009) Below is a diagram outlining the 5 key strategies in place at Rolls Royce to ensure its place in the future as one of the largest providers of marine, aerospace and energy technology providers.

Figure

3.4 Resource Based View – Capabilities View

The resourced-based view of strategy is "the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities". (Johnson, Scholes, & Whittington, 2009) Furthermore"The resource-based view of the firm (RBV) is an influential theoretical framework for understanding how competitive advantage within firms is achieved and how that advantage might be sustained over time"(Eisenhardt & Martin, 2000)

4.0Part 2

4.1Resources

The identification of resources coupled with the analysis is highly important as it provides organisations with the capabilities required. This is broken down into the tangible and intangible resources of Rolls-Royce Group PLC and the human resources of the firm.

4.2 Rolls Royce Intangible Resources

Rolls-Royce Group PLC’s intangible resources consist of the following; as "such as patents, brand name, reputation and trade secrets." (Pandza, Horsburgh, Gorton, & Polajnar, 2003) Rolls Royce’s branding and reputation is synnonmous amongst the 4 key areas, these being civil and defence aerospace aswell as marine and energy based sectors. This reputation alone is an intagible resource that provides potential customers, partners and investors with reassurance.

Rolls Royce excell themselves in their gas turbine technology, creating a serious competitive advantage over GE Aircraft Engines "Civil aerospace is a cyclical industry and the commercial cycle is unpredictable; many factors influence the pattern of new aircraft orders. Civil aero-engine manufacturers make large commitments to design and R&D in engine technology and manufacturing processes. For these reasons manufacturers will forge alliances with risk-sharing partners to collaborate on development work and manufacturing. In addition, all manufacturers have extensive sub-contract networks. The success of Rolls-Royce as the major rival to GE Aircraft Engines is attributed to its strengths in gas turbine technology and its product range (Rolls-Royce has the largest portfolio of engines and powers more types of civil aircraft than any other manufacturer)." (Pandza, Horsburgh, Gorton, & Polajnar, 2003)

With these major advances in intangible assets consisting of R&D work as well as exclusive patents and much more, Rolls Royce are able to offer an effective product to the customer, as well as provide the tangible aftercare.

4.3 Rolls Royce Human Resources

With "39,000" employees (DATAMONITOR, 2009) "Rolls-Royce provides competitive pay and benefits in all its locations and actively encourages share ownership by offering ShareSave plans to all employees. Our employees have currently committed around £105 million to these plans. In the UK, statutory arrangements enable employees to receive part of their annual bonus in shares and to make monthly share purchases from their salary." (Rolls-Royce, 2009)

Rolls Royce’s employees have a positive working structure and environment, with many benefits and resources available to better themselves and provide a better quality of work for the company. These benefits include the ShareSave scheme and other things like bi-annual reviews to ensure employees are having their needs met. (Rolls-Royce, 2009)

4.4 Rolls Royce Tangible Resources

"The tangible resources used are financial and physical. The financial resources involve a

variation of internal and external sources of funding, which enables the companies to invest

in research projects and programs; to attract the right people; in facilities for training and

education and for testing equipment; and to collaborate and acquire other companies.

Managers in both participating firms use either internal or external funds or both. The

physical resources required are good infrastructure such as testing and training facilities for

developing, and testing products and information technology." (Cranfield University, 2009)

In comparison to BAE Systems, Rolls-Royce Group PLC have a net cash flow of £9,082m and BAE £16,671m. "Services revenues increased by eight per cent to £2,420m on an underlying basis." And "Order book increased by £2bn to a record £57.5bn (2008 year-end £55.5bn)." (Rolls-Royce, 2009)

Rolls-Royce Group PLC

Figure (Rolls-Royce Group PLC, 2008)

Figure (BAE Systems, 2008)

4.5 Competencies

"Core competencies are the key skills, characteristics and assets that your company brings to the marketplace. These competencies, on an organizational level, are a synergistic blending of the core competencies that your people individually bring to work every day." (Ravenwerks, 2009)

"Example company core competencies:

Excellent Customer Service

(State, Nation, Worldwide) Information Networking

New Product Research and Development

Market Research

Relationship Development/Outreach" (Ravenwerks, 2009)

These example competencies are very broad, and are not the competencies that directly affect Rolls-Royce Group PLC. Below I will be outlining and identifying Core Competencies that relate to the company.

4.6 Core competencies (C.C)

"Rolls-Royce continues to invest in core technologies, products, people and capabilities." (Rolls-Royce, 2009) This statement from the Rolls Royce website shows their commitment towards the future and improving the running of the company and in turn the products produced.

The Rolls Royce brand is synonymous around the world, with major contracts in place with commercial and defence airlines. This reputation that has long existed since the establishment of the company is a key factor for many clients choosing Rolls Royce over its competitors.

R&D is a key competency of Rolls-Royce Group PLC with "Sixty per cent of research and development investment and 40 per cent of new product development spending over the past five years has been outside the UK. Research and development is carried out in facilities in the UK, Germany, Italy, Singapore, Japan, the US and Scandinavia, with particularly strong relationships with the 28 universities where there are Rolls-Royce University Technology Centres." (Rolls-Royce, 2009)

Key People, this refers to what was mentioned earlier in the introduction, with regards to the dedication Rolls Royce have towards human resources, and securing key people within the company from and early age.

Core Technologies, this regards the development of new technologies used within products, such as energy systems, for example Rolls Royce are the only company to design and build a nuclear reactor from the drawing board to the real world. Also all key patents held by Rolls Royce, which grant its advantage over competitors.

5.0 Part 3 - Diagnosing Strategic Capability

There are many ways of diagnosing strategic capability, the following have been chosen for their success is determining strategic capability. The value chain framework is especially good at outlining the key areas when delivering a product to the end consumer. Other frameworks and models such as benchmarking, SWOT and balanced scorecards are also highly effective. Ratio analysis provides an easier insight into the companies finances. All of these are covered in more detail below.

5.1 Value Chain(V.C)

The inbound logistics of a company broadly are the receiving, warehouse and the inventory control of input materials. The operations are activities that add to the value of the final product or service. Outbound logistics are activities that deliver the final product to the consumer; examples of this include warehousing and order fulfilment. (QuickMBA, 2009)

With regards to Marketing and Sales, these activities are to entice potential consumers into purchasing the end product/service, this is done through a variety of mediums such as advertising and pricing strategies. Service is a key sector of the value chain and especially with Rolls-Royce group plc as these activities are to ensure the maintenance of the product. Such as customer service and after sales care are key areas in the Rolls Royce core competencies. (QuickMBA, 2009)

Figure (QuickMBA, 2009)

5.2 Benchmarking

"Benchmarking can be used as a way of understanding how an organisation’s strategic capability, in terms of internal processes, compare with those of other organisations." (Johnson, Scholes, & Whittington, 2009)

The three main types of benchmarking are; Historical, Industry/Sector and Best-in-class. Historical benchmarking offers

5.3 Rolls Royce Key Ratios - Margin & Management Effectiveness Ratio’s

"The net profit margin ratio is the most commonly used profit margin ratio.

A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues.

A low profit margin ratio indicates that the business is unable to control its production costs.

The profit margin ratio provides clues to the company's pricing, cost structure and production efficiency.

The profit margin ratio is a good ratio to benchmark against competitors." (BIZWIZ Consulting, 2009)

BAE Systems 2008 Rolls-Royce Group PLC 2008

As you can see from above the ratio analysis shows the management effectiveness that BAE Systems is over double in terms of return on equity. An effectively managed company operates at an increased level that compliments other financials and key areas around the business. However Rolls Royce work on a far larger operating margin the BAE Systems, this operating margin is calculated by putting Operating Income over Net Sales, this gives you operating margin, and in this case the higher the ratio the better as it essentially denotes more GBP of sales. (Investopedia, 2009)

5.4 SWOT Analysis of Rolls-Royce PLC

Figure (Rolls-Royce Group plc Overview, 2009)

5.5 Balanced Scorecard

"The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals." (Balanced Scorecard Institute, 2009)

6.0 Part 4

6.1 Rolls-Royce Global capabilities

Civil Aerospace; "More than 600 airlines rely on Rolls-Royce power, including nine of the world's top ten. In the 1980s, Rolls-Royce took a strategic decision to have an engine available for as many new aircraft types as possible. The result has seen the company's share of the civil-engine market triple during those two decades to a current level of 30 per cent." (Rolls-Royce, 2009) This means that Rolls Royce can cater for nearly all airlines propulsion needs.

Defence Aerospace; "Military operators are adapting to a challenging and changing environment, with cost pressure on budgets and deployment costs, requiring innovative solutions. Rolls-Royce is responding to this changing environment with Mission Ready Management Solutions (MRMS ®)" (Rolls-Royce, 2009) This allows Rolls Royce to provide the best solutions to defence contracts possible, such as the Euro fighter combined project. Rolls Royce have "built unparalleled STOVL (short take off and vertical landing) experience with the Pegasus engine powering the Harrier fighter family" (Rolls-Royce, 2009)

Rolls Royce’s Global capabilities span over into marine and energy, specifically the development and deployment of nuclear energy solutions, be it land or sea. (Rolls-Royce, 2009)

7.0 Conclusions and Recommendations

The management effectiveness ratios shown above are poor in comparison to that of BAE Systems. Recommendations to improve on the Return on Equity ratio can be done by improving asset management, which as shown in fig.6 increased inventory is a key issue for Rolls Royce and will need action. On top of this the ratio also shows managements effectiveness in the case of balancing profitability, asset management and financial leverage. (The Motley Fool, 2009)

Also improvements in Strategic alliances and investments are key to Rolls Royce’s future success. Securing and procuring high value orders and overall expansion and growth in global aerospace and defense market" (DATAMONITOR, 2009) Will see Rolls Royce place secure in the future.