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AN INVESTIGATION INTO THE AEROSPACE INDUSTRY WITH SPECIFIC
REFERENCE TO THE AERO-ENGINE SECTOR AND ITS ELECTRONIC
ADVANCEMENTS
BY
JAMES GALE
2006
A dissertation presented in part consideration for the degree of MSc International Business
Abstract
This investigation initially analyses the general trends seen within the core sectors of the
aerospace industry. The external macro environment and the external industry
environment are then assessed using the relevant models and processes that have been
presented within the literature, with specific reference to the United Kingdom. In order to
develop a focused and detailed understanding of an aero-engine manufacturer’s internal
environment, a case-study Rolls-Royce is incorporated. Recent technological
developments seen within the complex aero-engine are examined, with specific reference
to electronics and the integration of the processes provided by Data Systems and
Solutions. The overall benefit derived from investment in these core areas is assessed and
examined in detail.
Acknowledgements
Many thanks to all of the people who have supported and encouraged me throughout this
dissertation.
James Gale
Table of Contents CHAPTER 1............................................................................................................................................. 1
INTRODUCTION.................................................................................................................................... 2
AEROSPACE INDUSTRY ........................................................................................................................... 2 CHAPTER 2............................................................................................................................................. 8
LITERATURE REVIEW ........................................................................................................................ 9
BUSINESS ENVIRONMENT ..................................................................................................................... 10 - External Macro Environment ........................................................................................................ 11
PEST Analysis............................................................................................................................................ 11 Porter’s Diamond Model ............................................................................................................................ 13
- External Industry Environment...................................................................................................... 17 Porter’s Five Forces Model ........................................................................................................................ 17 Flagship Model .......................................................................................................................................... 19
- Internal Firm Environment............................................................................................................ 21 Core Competencies .................................................................................................................................... 24 Value Creating Industries ........................................................................................................................... 25
- Business Relationships .................................................................................................................. 26 - Strategic Alliances/Joint Ventures ................................................................................................. 30
CHAPTER 3........................................................................................................................................... 34
HYPOTHESES....................................................................................................................................... 35
JUSTIFICATION ..................................................................................................................................... 37 CHAPTER 4........................................................................................................................................... 38
METHODOLOGY................................................................................................................................. 39
CHAPTER 5........................................................................................................................................... 45
ANALYSIS ............................................................................................................................................. 46
MARKET TRENDS ................................................................................................................................. 46 - Civil Aerospace............................................................................................................................. 47 - Military Aerospace........................................................................................................................ 52 - Aero-Engine Industry .................................................................................................................... 55
BUSINESS ENVIRONMENT ..................................................................................................................... 56 - External Macro Environment ........................................................................................................ 56
PEST Analysis............................................................................................................................................ 57 Porter’s Diamond Model ............................................................................................................................ 63
External Industry Environment ........................................................................................................ 66 Porter’s Five Forces Model ........................................................................................................................ 66 Flagship Theory ......................................................................................................................................... 69
- Internal Environment .................................................................................................................... 70 Business Relationships - Rolls-Royce .......................................................................................................... 70 Data Analysis............................................................................................................................................. 79
CHAPTER 6........................................................................................................................................... 91
DISCUSSION ......................................................................................................................................... 92
CHAPTER 7........................................................................................................................................... 96
CONCLUSION....................................................................................................................................... 97
FURTHER RESEARCH........................................................................................................................ 98
CHAPTER 8........................................................................................................................................... 99
REFERENCES..................................................................................................................................... 100
CHAPTER 9......................................................................................................................................... 109
APPENDIX........................................................................................................................................... 110
List of Figures FIGURE 1: MAJOR EUROPEAN AEROSPACE CROSS-HOLDINGS IN 2004 (ASD, 2003)....................................... 4 FIGURE 2: CONSOLIDATION PROCESS IN THE EUROPEAN AEROSPACE INDUSTRY: 1990-2003 (ASD, 2003) .... 5 FIGURE 3: PORTER’S DIAMOND MODEL (PORTER, 1990)............................................................................ 14 FIGURE 4: PORTER’S FIVE FORCES MODEL (PORTER, 1980)....................................................................... 18 FIGURE 5: FLAGSHIP MODEL FRAMEWORK (D’CRUZ AND RUGMAN, 1997) ................................................ 20 FIGURE 6: ALLIANCES WITHIN THE AERO-ENGINE INDUSTRY (DUSSAUGE AND GARRETTE, 1995) ................ 32 FIGURE 7: CIVIL AEROSPACE INDUSTRY TURNOVER - EUROPEAN UNION (ASD, 2004)............................... 48 FIGURE 8: EU AEROSPACE TURNOVER PERCENTAGES - CIVIL/MILITARY (ASD, 2004)............................... 52 FIGURE 9: MILITARY AEROSPACE INDUSTRY TURNOVER - EUROPEAN UNION (ASD, 2004)........................ 54 FIGURE 11: DS&S DATA ANALYSIS FOR BROADBAND VIBRATION ON TWO TRENT 700 ENGINES .................. 77 FIGURE 12: ENGINE SHOP VISIT - REWORK LEVEL FOR CORE ENGINE MODULES ........................................ 81 FIGURE 13: EXAMPLE OF YEARLY ESCALATION VALUES FOR TOTALCARE® CONTRACTS.............................. 83
1
Chapter 1
Introduction
2
Introduction
Aerospace Industry
The aerospace industry is a vast, complex and dynamic market which is categorised into
three core industrial sectors: systems and frames, engines, and equipment. In addition,
there are also three product segments which are characterised as: aircraft, missiles and
space (European Aerospace Industry (EAI) - 2002). The main customer divisions which
are the source of demand for the products and services provided by this business
environment are categorised into civil aerospace and military aerospace.
The foundations to the aerospace industry were originally set out around the Second
World War, after which it has continued to rapidly expand and develop into a successful
business environment (Alfredsson and Hildingson, 2003). Throughout this time, the ever
increasing demand for public air travel has driven the civil sector whilst demand for
homeland security has been the source for growth within the military sector. The two
regions that have been at the centre of this development have been the United States and
the European Union. Over time, they have come to dominate the marketplace and in 2004
accounted for 84.6% of the total consolidated turnover within the industry (AeroSpace and
Defence Industries Association of Europe (ASD), 2004).
Due to the nature of the environment, the industry has gradually become internationalised
and increasingly competitive for the firms that operate within it. In each of the regions, a
unique structure has developed whereby there are several core organisations that focus on
the manufacturing process and in turn, these are supported by an extensive supply chain of
other businesses (Alfredsson and Hildingson, 2003). For example, within the civil aircraft
3
business there are two core manufacturers, Airbus and Boeing, however in turn these are
both supported in all relevant areas by a wide range of other organisations. A similar
situation is also present in the aero-engine sector, with it being dominated by three core
firms: General Electric, Rolls-Royce, and Pratt and Whitney all of whom are supported by
an extensive network.
The market structure is also dominated by unique relationships which are formed due to
the high cost barriers present in producing products such as airframes and aero-engines.
As a result, organisations can become both partners and competitors within the same
business environment as they strive to remain competitive in the market. In relation to this,
smaller companies often operate within their own specialised role which is part of a much
larger project (de Jong, 1998).
The relationships that develop over time have become an integral part of the aerospace
industry. From these interactions, a network of strategic relationships, joint ventures,
international consortia and partnership agreements have been created (ASD, 2003). These
not only incorporate organisations from Europe and the United States but also Asia, South
Africa, Australasia and the Far East (ASD, 2003). Figure 1 highlights the main cross-
holdings present within the European aerospace industry in 2003.
4
Figure 1: Major European aerospace cross-holdings in 2004 (ASD, 2003)
In order for firms to remain economically successful and competitive against national and
international organisations, there have been numerous mergers and acquisitions. These
processes enable firms to consolidate their position on the international stage which is
becoming more important in achieving the level of success required by shareholders.
Figure 2 highlights the recent consolidation processes which have been undertaken within
the European Union.
5
Fig
ure
2: C
onso
lidat
ion
proc
ess
in th
e Eu
rope
an A
eros
pace
Indu
stry
: 199
0-20
03 (A
SD, 2
003)
6
The nature of the aerospace market and the levels of investment within research and
development have placed the industry on the technology frontier (Alfredsson and
Hildingson, 2003). The structure of the industry and important inter-relationships which
are present are able to aid in the distribution of new innovation and technology. This in
turn, gradually diffuses throughout supporting companies and industries, further
improving technical abilities along with capabilities and opportunities. These so called
‘spill-over’ effects are valuable to any economy as it increases efficiency and the ability
for organisations to compete on an international scale.
The aerospace industry has come to play an increasingly crucial role within national
economies. The growth within both civil and military sectors of the aerospace industry not
only provides potential for further national economic development, but also many other
attributable benefits. One of the most important is that of technological innovation which
provides a base from which to develop. Companies often invest heavily within research
and development in order to remain competitive over their rivals. It has been well
researched that there are ‘first-mover’ advantages and this has become vital within civil
and military aerospace (Mueller, 1997).
Due to the overall importance of aerospace organisations, a growing trend has been seen
in the supporting policies which have been introduced. These are often introduced on a
national level but regional policies do exist, such as those developed within the European
Union. Policies relate to issues such as research and development, funding, taxation
benefits and levels of local protectionism. The aim of such policies is to ensure the
continued success of aerospace firms whilst ensuring their competitiveness and continued
growth within the sector. However, Bechat et al. (2002) emphasises that it is essential to
7
balance such issues on an international scale in order to ensure a level ‘playing field’.
Ensuring this will allow for the industry as a whole to develop and grow further into a
successful business environment.
In order to assess the complex aerospace market in more detail, it is important to examine
the current literature which will provide insight and understanding into the industry. Only
after this process has been undertaken can the analysis for this investigation commence.
8
Chapter 2
Literature Review
9
Literature Review
The aero-engine industry consists of several organisations who dominate the market:
General Electric, Rolls-Royce and Pratt and Whitney. Between them they have control of
a large proportion of the market share, with other smaller companies accounting for only a
small percentage of overall sales. Due to the dominance of just several firms, the aero-
engine industry currently displays the characteristics of an oligopoly.
One of the major features of oligopolies is the existence of barriers to entry, which can
exist due to both strategic and also natural reasons. The natural barriers to entry are
determined from exogenous costs, which to a great extent are outside an organisations
control. Costs of labour, technology, land, premises, and materials are determined by the
local market conditions and therefore firms can have little influence upon their levels. For
a specific industry these costs, if large enough, can develop a barrier to entry. The
minimum efficient scale (MES) determines the level at which a firm looking to compete
within a specific market would have operate above. In oligopolies, the MES is high in
relation to the overall market and thus prevents an inflow of new investment (Begg and
Ward, 2004).
The second barrier to entry, or strategic barriers, can be developed by firms within the
market. Firms are able to manipulate the overall cost nature in strategies such as
advertising and branding through which the MES is driven higher and subsequently
prevents the development of further competition.
10
As a result of the barriers which develop, oligopolies often maintain the characteristic of
being dominated by several core organisations. Within the aero-engine market both of the
preventative characteristics are present. Firstly there are high costs associated within entry
into this high-technology market but in addition, this is developed further through the
branding and reputations of the current operators. The overall business environment
demands extremely high levels for quality and safety of products and this has been
achieved through long-term investment and development. It is as a result of this that the
firms involved have been able to maintain and protect their hold upon large proportions of
the market.
Due to the nature of oligopolies, there is increased importance on each firm taking into
account the others which are present. The firms are mutually dependent upon one another
because they are all affected and influenced by their rivals. Therefore, no firm can ignore
the actions and reactions of others within the industry (Sloman, 1998).
Business Environment
The overall competitive success of organisations is determined by the business
environment and the complex interactions within the external macro environment, the
external industry environment, and the internal firm environment (Mellahi, Frynas and
Finlay, 2005). Analysing and understanding these related areas enables organisations to
understand the context within which a specific strategy needs to be developed and
implemented.
11
- External Macro Environment
PEST Analysis
The external macro environment consists of four criteria: political, social, economic and
technological (PEST). These provide a company with both threats and opportunities
however, due to the nature of the external environment these are outside the control of any
business. It is important therefore, that the external environment is matched to the
resources and activities that a firm undertakes otherwise failure is a strong possibility.
The political category is mainly dependent upon the Government policy within a particular
nation. Governments have strong influences on any business trading within its borders and
understanding their policies and objectives is crucial. Issues such as, “tax, employment
laws, regulations, trade restrictions, tariffs, and political stability in addition to
understanding and assessing the availability of raw materials and supplier development”
(Schildhouse, 2006) are just some of the wide ranging factors. There is a desire by all
firms to acquire knowledge in all of these important areas as it can be extremely beneficial
in the long-term performance of a business.
The economic category is quantitative based, which allows for a more precise analysis. At
the core are economic growth, exchange rates, interest rates, and inflation. Understanding
the impact of these issues and keeping track of any changes, allows a firm to be prepared
and make timely decisions when they are required.
The social assessment is a more subjective method which looks into the population
growth, demographics, and social cultures. Which areas are investigated and how this
process is completed is dependent on the organisation. It is based largely around the
12
individual however, it can also be correlated back to the economic factors (Schildhouse,
2006).
The final category is that of technology. This is assessed through looking at the rate of
technological change which is occurring in a particular country or region. At its core the
analysis becomes infrastructure-based, as this is the platform from which further
advancements can arise (Schildhouse, 2006). In addition, indicators include present levels
of investment by both the Government and other organisations, along with the extent of
research and development activity.
A firm completing a PEST analysis is able to gain a more detailed view of the business
environment within which it operates. However, a firm can take this further through
evaluating four criteria: Strengths, Weakness, Opportunities and Threats (SWOT).
Undertaking this process allows firms to recognise the risks associated within an
environment and is therefore a significant tool for decision making (Schildhouse, 2006).
Weihrich (1982) highlights that this method can aid an organisation in changing its
position from a reactive stance to a proactive strategy, a process which can be significantly
beneficial.
The ideology behind the PEST analysis is that through the correct process, an organisation
within a specific industry can formulate and implement suitable strategies. This will aid in
taking advantage of the opportunities whilst remaining aware of the possible difficulties
that could be faced in the future. However, it is important that the process is continually
updated and improved so that managers are able to utilise the framework effectively
(Mellahi et al., 2005).
13
The understanding of the external macro environment which is developed through
utilising PEST analysis can also explain why some firms and industries within specific
countries are more successful than others. Porter (1990) takes this reasoning further and
has developed the Diamond Model which analyses the ‘national base’ as a source of
competitive advantage in global markets.
Porter’s Diamond Model
In order to understand how, why and where successful industries are established, one must
look at the issues associated with national advantages. At present one of the most
recognised and widely accepted models analysing this particular area is that presented by
Porter (1990) in, ‘The Competitive Advantage of Nations’. Within this Porter developed
four core national determinants which specify why some industries succeed in a nation
whilst they fail in another. The analysis takes into account the characteristics of ‘Factor
Conditions’, ‘Demand Conditions’, ‘Firm Strategy, Structure and Rivalry’ and ‘Related
and Supporting Industries’. In relation to these, the issues of ‘Government’ and ‘Hazard’
are also incorporated. When encompassed together they form the Porter Diamond which
can be seen below in figure 3.
14
Figure 3: Porter’s Diamond Model (Porter, 1990)
Factor conditions are the first main aspect that Porter (1990) developed. This category
takes into account the national resource base that is available to a country in the form of
human, material, knowledge, capital and infrastructure. These are effectively the nucleus
to all markets and are required to some extent for a firm to become established and
eventually succeed. In adverse instances where one or more of these are not present, a firm
becomes dependent upon innovation through which a comparative national advantage may
develop.
Demand conditions are the second category within Porter’s diamond model. This analyses
the level of home demand for the products and services of a particular industry with the
main determining factors being composition, size and growth. In addition the
internationalisation process is important especially when domestic demand is limited. This
can reverse any negative issues into positive influences for organisations.
15
The third category Porter places emphasis on is the related and supporting industries.
These two areas are essential and when firms present within these categories become
internationally competitive, it only aids in the overall strengthening of the system. Benefits
such as innovation and efficiency are developed that in turn support the national base.
The fourth category within Porter’s model is that of firm strategy, structure and rivalry.
When the correct combination of these three areas is incorporated into a national industry,
there is the increased probability of a firm being internationally successful. An industry
and the firms within it are able to develop a strong national base from which they can
advance and achieve on a global scale.
In addition to the four categories, it is important to recognise the importance the
Government plays within the Diamond Model. The Government can have both a positive
and negative influence upon all four of the factors. Issues such as investment in
infrastructure, laws and regulations, taxes, education, and financial support are just some
of the areas in which Governments can have an affect. Although overall competitiveness
of an industry is not completely determined by the Government, its role is significant and
must therefore be taken into consideration.
Hazard is the final issue associated with Porter’s diamond model and takes into account
financial fluctuations, political unrest and technological breakthroughs. Again these are
recognised as potentially having either a positive or negative influence upon an industry
and are often dependent upon how a nation or industry deals with each issue. Porter
highlights that when a more favourable diamond is present, there is increased potential for
developing a competitive advantage from any hazard that may arise.
16
It is important to understand that all of the categories influence on another and are to some
degree interdependent. Changes in one area will subsequently have an impact on another.
Also, these factors can change over time and so therefore must be taken into consideration.
When the correct combination of positive factors is present then the strong home base
which develops provides the relevant businesses with a base for innovation, which in turn
can lead to global success (Mellahi et al., 2005).
Porter (1990) recognises that there are other criteria that determine the success of firms on
a national and international level, such as management styles and organisational
structures. However, within industries these are known to converge over time and thus
differentiation becomes increasingly difficult. Globalisation has spread resources and
knowledge across the world and therefore, the four non-controllable factors of the
diamond model become the determinants for the development of a competitive advantage
(Mellahi et al., 2005)
Overall therefore, understanding the conditions highlighted by Porter (1990) enables
nations and also the organisations within them to develop and become successful. They
can focus on areas and industries that are sufficiently supported whilst also working to
achieve improvement in those areas that do not reach the desired standards.
These processes and models of analysing the external macro environment will enable a
detailed analysis of the aero-industry, with more specific examination of Rolls-Royce as
the core case-study for the aero-engine organisations.
17
- External Industry Environment
The external industry environment is another important area associated with the success of
organisations. It consists of all the factors stemming from actions undertaken by suppliers,
buyers, competitors and others which directly influence the level of competitive success
within a specific industry (Mellahi et al., 2005). It is important that a firm understands
these issues and is able to relate them back to their own business. In doing so they can
ensure that resources and the subsequent activities are matched. In addition, Porter (1980;
1985) suggests that a firm must also understand the underlying economic and technical
characteristics of an industry in which they operate.
Porter’s Five Forces Model
Porter’s Five Forces model (1980; 1985), as seen in figure 4, takes into consideration two
fundamental issues which drive the success and therefore profitability of an organisation:
industry attractiveness and competitiveness. These are themselves determined by five core
forces: ‘rivalry among existing competitors’, ‘threat of new entrants’, ‘threat of
substitutes’, ‘bargaining power of suppliers’, and ‘bargaining power of buyers’.
Understanding these five forces enables firms to develop greater knowledge on their
external industrial environment which can therefore aid them in becoming more successful
over time.
18
Figure 4: Porter’s Five Forces Model (Porter, 1980)
Although some criticism, in the form of understanding change (D’Aveni, 1994; Harvey,
Novicevic and Kiessling, 2001) and level of profitability (Rumelt, 1991; Mauri and
Michaels, 1998), have been issued to the Five Forces model, it is still recognised as an
important organisational tool. Porter himself has stated that industries can and do change
in unpredictable ways and that no type of model can forecast such fundamental
fluctuations. However, for the majority of established industries, the external environment
is one which sees only gradual change and development over time and can therefore be
understood further through incorporating such models.
In order to analyse the evolution of an industry, Vernon (1966) developed the Product Life
Cycle which aids in understanding the evolution of a product through its four life stages:
19
introduction, growth, maturity and finally decline. This research was taken further by
Vernon (1966) and later Wells (1968), in the International Product Life Cycle Model
which developed five stages of development, from home country introduction through to
export by developing nations. Such models aim to produce a general trend that the
majority of products are expected to proceed through as they pass through their life.
Although globalisation has produced a significant shift in product development, these
models are still able to provide managers with a level of insight which can be utilised.
Flagship Model
The Flagship Model, figure 5, introduced by D’Cruz and Rugman (1997) goes against the
traditional competition theories which depict arm’s length relationships as seen in the Five
Forces Model (Porter, 1980). Instead of analysis on a short-term basis the Flagship Model
proposes a long-term competitive system which aims to outperform competition within the
industry. The system is dominated by one main flagship firm which has the resources and
capabilities to attain the level of financial success that is required by all those involved.
This firm subsequently provides the important leadership, direction, strategies, and
decisions.
20
Figure 5: Flagship Model Framework (D’Cruz and Rugman, 1997)
In conjunction with the presence of one main flagship firm, another major characteristic is
the establishment of strong relationships. These are often developed over time with the
main consumers, suppliers, and select competitors. They are all initiated by the flagship in
order to perform functions more effectively which in turn improves the overall system. In
addition, flagship firms often develop important relationships with non-business
infrastructure including Governments, non-trade service sectors, educational institutions,
research centres, trade unions, and trade associations to enable yet further business
advancement. With these relationships the flagship system develops a vertically integrated
chain of organisations which in turn creates a complex business network in the pursuit of
long-term economic success.
21
Competition is driven between flagship firms, but in some instances co-operation between
them in term of joint ventures does occur when risk and revenues are too high for an
individual to pursue alone. This enables flagships to advance technology and research,
further improving the products and services which they are able to provide.
The partnerships between all members develops a situation where sharing of market
intelligence, intellectual property, knowledge, and technologies occurs in order to achieve
success for the whole business network. Each individual organisation understands what
they desire and expect from the business relationships and in the long-term they work
together in order to maximise success, which in turn benefits each of the individuals
involved.
The analysis models utilised for the understanding of the external industry environment
provide the opportunity to further develop a complete picture of a particular market.
Through implementing these processes in relation to the aero-industry it will provide
further insight into the present situation and aid further in the understanding of this
particular business sector.
- Internal Firm Environment
Knowledge bases have always been, and will always remain, a core internal determinant
to the success of a business organisation. Knowledge bases are a collection of information
that pertains to a specific area within an organisation that enables them to be successful
through criteria such as product development and innovation. They are resources
integrated into the dynamic framework of a business, which need to evolve over time as
the firm progresses through its own stages of development.
22
Pavitt (1986) emphasises that industry leaders have managed to retain knowledge bases
due to their ability of creating opportunities. The capacity to retain this is dependent upon
learning from experience, accumulated expertise and the capacity for integration. Without
these there can be no learning and therefore a reduction in the ability to re-create
opportunities.
At the core of knowledge bases is the ideology of knowledge itself. However, the current
understanding of knowledge on an organisational and industrial level has developed
several concepts within the literature.
Implementation of the neo-classical understanding of knowledge is possible, and even
successful, when it is sufficient to have simple representations of simple systems. This is
achievable in industries of mono-technological systems with low regional intensity which
do not develop complex networks and inter-relationships (Paoli and Prencipe, 1999). In
these situations knowledge develops the characteristics of perfect explicitability, perfect
decomposability, perfect transferability, indistinguishability of the process from the
product and finally distinguishability between scientific and technological knowledge
(Paoli and Prencipe, 1999). This allows all types of knowledge to be reduced to their most
simplistic form, information.
This neo-classical understanding has been linked to the virtual corporation model that was
developed by Byrne, Brandt and Port (1993) and has since continued to be extensively
revised and developed. The virtual corporation model uses technology to link people,
assets, and ideas within a temporary organisation. Core differentiation, soft integration and
virtual realisation are the three core factors which provide the potential for a firm to
23
become successful (Scholz, 2000). In addition, empirical evidence from Scholz (2000)
highlights that firms which have integrated such methodologies have been able to develop
significant economic benefits as a result. However, a negative implication of this system is
that economics becomes the dominant force and therefore any organisational operation,
such as the viability of outsourcing, becomes solely dependent on this factor.
In more complex product systems, such as in the aero-engine, the complete reliance upon
economic determinants and the lack of reference to other significant issues reduces the
compatibility with the neo-classical definition. In these industries there are different
product characteristics, innovation dynamics, and strategic and management options
which consequently limit the overall applicability (Paoli and Prencipe, 1999).
In the literature, knowledge in complex product systems can be correlated to the
evolutionary theory. This method considers knowledge as a system of processes deeply
rooted in their contexts of production while there is a high degree of tacitness and non-
decomposability (Paoli and Prencipe, 1999). The result of this is that not all knowledge
can be reduced to the smallest level, information, so therefore organisations must maintain
a degree of understanding and integration capacity.
In these complex environments there can be a degree of networked innovative activities
and a use of external sources for development and manufacturing. This is clearly seen
within aero-engine producers who have a high level of external agreements, in terms of
both activity and scope (Paoli and Prencipe, 1999). However, in these instances, system
integrators maintain their importance for the success of an organisation. It is crucial that
24
the firm maintains knowledge bases along with their generative contexts (Paoli and
Prencipe, 1999).
Core Competencies
In order for a firm to operate effectively and efficiently within an industry it must be
aware of its resources and capabilities. These enable a firm to operate within an industry,
however they do not always enable a firm to develop a competitive advantage within a
market. This advantage and ultimately the degree of success are often determined by the
core competencies found within a firm (Mellahi et al, 2005). Core competencies are
technologies and production skills which underlie a company’s product lines and are
regarded by many within the literature as one of the critical areas within an organisation
(Tampoe, 1994). Prahalad and Hamel (1990) explain that in the long run, competitiveness
stems from the ability to build on these core competencies as they govern the, “collective
learning in the organization, especially on how to coordinate diverse production skills and
integrate multiple streams of technologies”.
Core competencies can be identified using the VRIO framework (Barney, 1997) which
looks at whether resources and capabilities are valuable, rare, costly to imitate, and
exploited by the organisation. Managers can use this information to further enhance the
firm and ensure that they possess a competitive advantage. However, Prencipe (1997)
states “rules of competition change over time, in that core competencies considered to be
key for a business sector may eventually become trivial, and vice versa”. Therefore, the
management decisions on issues such as this have become of crucial importance for a
firms long-term survival.
25
Value Creating Industries
Due to globalisation and the rate of economic growth on a world-wide scale there has been
increasing levels of demand for businesses to obtain value-creating activities from a whole
range of sources. There has been a general trend for utilising opportunities outside the
internal firm environment for developing the essential value-creating activities (Mellahi et
al., 2005). Financial success is at the core of almost all organisations and thus the need to
minimise costs whilst elevating revenues is a constant requirement. Insinga and Werle
(2000) state that this trend has led to the proliferation of international strategic alliances,
or simply the outsourcing of certain business functions, by buying goods and services
from external sources.
The use of external sources in the manner discussed by Insinga and Werle (2000) is
strongly related to economic issues. Managers should utilise external sources when the
cost of undertaking the task is cheaper than completing it internally. This criterion is also
the main determinant when a firm must decide on whether to incorporate domestic or
foreign sources. It is however vital that a firm does not reduce its ability to compete or
develop an advantage over rivals within the market when adapting such strategies. Also, it
is important that other issues such as intellectual property rights are taken into
consideration. Due to their importance managers, must understand these issues as they can
significantly affect a firm’s business plan and long-term success. The concepts of value
added, value chain, and value system analysis are all methods which can be utilised in
order to aid in such business decisions.
26
- Business Relationships
Product systems are characterised by interactions across whole organisational structures
and at all levels including component, subsystem, and system (Prencipe, 1997). There are
a high number of interdependencies upon each of these levels which in turn, categorise the
degree of performance which is achievable. Such product systems are subject to technical
change at any level through modular, architectural and radical innovation (Henderson and
Clark, 1990).
The aero-industry is described within the literature as multi-technology and multi-
component in nature. The engines produced are classified as complex product systems due
to the forty thousand individual components which vary in technological value and need to
successfully integrate them. Undertaking the integration of a product of this nature
generates a situation where development, production, change and innovation cannot be
undertaken solely within the boundaries of one organisation. For this reason, an
organisation involved within such a market needs to utilise external sources.
Due to the extensive product environment within the aero-engine industry, there are vast
arrays of competencies that can be developed within a firm. However, as Prencipe (1997)
explains, a firm’s success is often dependent upon whether it is able to correctly evaluate
each of these competencies. Through this process, a firm can retain those practices which
are most vital whilst contracting out those which are not.
Within the literature there are currently two main business strategies that are incorporated
by organisations to deal with the additional processes that cannot be completed internally:
vertical integration and outsourcing. Vertical integration represents the expansion of a
27
firm’s activities to include processes carried out by suppliers or customers (Mellahi et al.,
2005), whereas, outsourcing utilises inputs that have been produced and delivered to the
firm by independent suppliers (Kotabe, 1992). However, the literature has contradicting
view points on the most suitable method that should be employed by firms to increase the
probability of success.
Porter (1980) highlights that there are many benefits to a firm incorporating a vertically
integrated strategy. The majority of these are economic in nature, with the ability to raise
barriers to entry, offset bargaining power, generate a higher return on business and also
defend against foreclosure which can ultimately restrict an organisation. In addition, firms
can become more stable through understanding demand whilst also reducing quality
issues, uncertainty, and costs.
Porter (1980) highlights that the technological knowledge that is derived from vertical
integration is considered a benefit, as organisations can gain from the use or understanding
of it. However, full integration not only provides its own difficulties but also increases the
degree of risk. This is derived as a firm must accept complete responsibility for
developing its own technological capabilities rather than utilising the distinctive
competencies that had previously been developed by others.
Although Porter (1980) highlights some risk associated with vertical integration, empirical
evidence from studies completed by Prahalad and Hamel (1990) and Stalk, Evans and
Shulman (1992), suggest that developing competencies through such actions is a necessity
to remain competitive over rivals within a market. Research by Bell and Pavitt (1993)
supports this ideology and emphasise that technological capabilities are developed from
28
interactions between research and development, product and process engineering, and also
manufacturing activities. The inter-relationships enable firms to generate and manage
technological change, an issue which has become essential due to the difficulties that arise
when attempting to transfer knowledge. Therefore, retaining these core processes is
essential to a firm’s survival.
Monteverde and Teece (1982) highlight that vertical integration can be correlated to
efficiency considerations. Through research it was discovered that undertaking such a
strategy can increase coordination of production and also reduce the level of exposure to
opportunism from suppliers. However, Prencipe (1997) states that it is also a matter of
mastering evolutionary dynamics. Without these, an organisation loses the ability to
introduce innovation which minimises the sustainability of generating competitiveness.
Stuckey and White (1993) relate vertical integration to market structure and state that as
one changes the other should follow. If there are a small number of buyers and sellers,
high asset specificity, durability and intensity, and frequent transactions, then a vertical
market may fail. Organisations must therefore adapt their strategies in order to take such
knowledge into account. In opposition to this, Prencipe (1997) states that due to the
features of technological knowledge such methods are deemed inappropriate and are not
feasible within markets of complex-product systems.
From the perspective of outsourcing, there are also many potential benefits. One of the
most significant is that of cost saving. Research undertaken by Gilley and Rasheed (2000)
shows that firms undertaking outsourcing achieve high cost advantages relative to those
29
deciding upon vertical integration. One of the main drivers behind this is the promotion of
competition between suppliers which reduces costs, whilst increasing the level of quality.
Outsourcing provides access to proprietary knowledge through the suppliers, which can
then be utilised by the organisation. In most instances this would have otherwise not been
available. Other benefits include a degree of flexibility as suppliers can be changed over
time as new technologies, practices and processes become available and the needs of the
business evolve. Finally, outsourcing also provides the ability to focus upon core areas of
the business instead of inefficiently utilising important resources.
There are however, risks associated with the outsourcing process. One of the most
significant that can arise is agreement failure. Dun and Bradstreet (2000) reported that half
of all outsourcing agreements fail within five years due to issues of culture, costs, and
service. When agreement failures occur they can be extremely costly to organisations and
prove difficult to overcome.
Prencipe (1997) emphasises that outsourcing of any technologies deemed not relevant to
an organisation may damage a firms ‘change-generating capacity’ along with its ‘context
of learning’, and therefore the ability to master the evolutionary dynamics of product-
systems. Contexts provide the base for new knowledge and thus should not be removed
from the internal business environment. In addition, extensive outsourcing can also lead to
a ‘hollow’ firm by which the reliance upon external sources becomes too great and
ultimately results in failure (Mellahi et al., 2005).
30
Overall therefore, there are both advantages and disadvantages to vertical integration and
outsourcing. Due to this, business decisions on which method to incorporate into the
corporate strategy have become major issues for firms. Economic factors have become
central to many decisions however, from the review of current literature it is clear that
when making a decision of this nature other factors must be considered and taken into
account.
- Strategic Alliances/Joint Ventures
The use of strategic alliances and joint ventures is one method incorporated by
organisations in an attempt to develop, expand and improve (Dussauage and Garrette,
1995). A joint venture involves two or more individuals or companies engaged in a
solitary business deal, which has been arranged in order to generate profits. Although the
management of joint ventures can be difficult, long-term success can be extremely
beneficial to organisations (Lorange and Roos, 1992). Such business relationships are a
more recent occurrence in many industries but have been present in the aerospace sector
since the 1960’s.
In recent years, there has been a general shift from the use of international joint ventures
to strategic alliances. The main difference between the two is that strategic alliances are a
more long-term and diverse process often undertaken between competitors within the
same market. The two driving forces behind this change have been globalisation and
technology. The process of globalisation is making global business markets increasingly
uncertain, mainly as a result of higher levels of competition. Due to this, it is now
emphasised in the current business literature that being a strong multinational with suitable
strategy based on competition, is not enough to ensure a sustainable competitive
31
advantage. In addition, with ever improving technology in all areas of the business
environment, firms are seeing shorter product life cycles, faster obsolescence, rising costs
and the rising demand for new technology. Technological change is fragmenting global
markets and emphasis is placed on organisations to develop a clear product strategy that
takes into account these factors (Hayes, Pisano, Upton, and Wheelwright, 2005). Erhorn
and Stark (1994) stated, “world-class product development is the key to competitive
advantage within global markets and so organisations need to be proficient at this core
activity”. Strategic alliances offer organisations the possibility to achieve these core
objectives.
A strategic alliance is defined by Gulati and Singh (1998) as, “any voluntarily initiated
cooperative agreement between firms that involves exchanges, sharing, or co-
development, and includes contributions by partners of capital, technology, or firm-
specific assets”. Over recent years there has been a rapid increase in the number of
strategic alliances being formed across the globe. This trend has reversed the more
common ideology of firms being independent entities that use internal skills and
knowledge, to establish themselves as market leaders. The development of alliances
enables the achievement of strategically significant objectives, that are mutually beneficial
and beyond what a single firm could attain (Mellahi et al, 2005).
Porter and Fuller (1986) state that strategic alliances blur the distinction between
competition and cooperation and therefore, can lead to significant management issues.
However, strategic alliances have successfully been incorporated into many industries and
are gradually becoming more integrated into the business environment. At present, cross-
border alliances between competing firms in the aerospace industry account for a
32
significant proportion of the total number of partnerships set up in manufacturing
industries world-wide (Hartley and Martin, 1990). One of the main processes is the Risk
and Revenue Sharing Partnerships (RRSP’s) that enable all firms involved to develop a
comparative advantage from the relationship. Figure 6 shows some examples of the
extensive international strategic alliances that have been initiated for the development of
several aero-engine models.
Figure 6: Alliances within the aero-engine industry (Dussauge and Garrette, 1995)
In the aerospace industry, the motives for utilising strategic alliances lies in the form of
reduced R&D costs and access to intangible assets, such as skills and knowledge, at a rate
that is both quicker and cheaper than competitors. The integration of competencies and
capabilities of two or more organisations can subsequently increase the levels of
competitiveness within a specific business environment.
However, as Mellahi et al. (2005) highlight, it is vital that the correct partner is selected
and that they achieve the appropriate strategic, operational and cultural fit. Medcof (1997)
suggests that management should take into account four key criteria: capability,
Engine Model Strategic Alliance Partner Firms Olympus 593 Rolls-Royce, Snecma
CFM-56 General Electric, Snecma EJ-200 Rolls-Royce, MTU, Fiat Aviazione, ITP
MTR 390 MTU, Turbomeca, Rolls-Royce RTM 322 Rolls-Royce, Turbomeca
Adour Rolls-Royce, Turbomeca Larzac Snecma, Turbomeca, MTU, KHD RB-199 Rolls-Royce, MTU, Fiat Aviazione
BMW-RR BMW, Rolls-Royce SST-Engine Rolls-Royce, Snecma
GE 90 General Electric, Snecma V-2500 (IAE) Rolls-Royce, Pratt and Whitney, MTU, Fiat, JAEC
33
compatibility, commitment, and control when the selection of a partner is made. If all of
these conditions are not achieved then failure is a much greater possibility.
Jordan and Lowe (2004) draw attention to the dilemma that strategic alliances develop for
organisations. They highlight that, “on the one hand, alliance success is associated with
high levels of interaction and co-operation between partners however, full and open co-
operation exposes a firm’s distinctive knowledge and skills and makes it vulnerable to
opportunistic moves by alliance partners”. As a result, the fundamental ‘learning’ and
‘knowledge’ paradoxes arise, in that “to gain the greatest benefits an organisation must
exchange information and knowledge with external parties yet, at the same time, they
must protect themselves against knowledge appropriation” (Larrson, Bengtsson,
Henricksson and Sparks, 1998). If protection is not considered, the resulting loss of
knowledge and competencies can be significantly detrimental to any organisation.
In the aerospace sector, the issues discussed appear more acute as a result of the political
imperatives which strongly influence partner choice and the fact that collaborators are
often strong rivals in other contexts (Jordan and Lowe, 2004). This emphasises the
importance of partner selection and the crucial role of management in the overall success
of strategic alliances.
34
Chapter 3
Hypotheses
35
Hypotheses
Hypothesis 1:
Alternative Hypothesis (H0):
Data trends show potential for continued growth throughout the core sectors of the
aerospace industry.
Null Hypothesis (H1):
Data trends show no potential for continued growth throughout the core sectors of the
aerospace industry.
Hypothesis 2:
Alternative Hypothesis (H0):
The business environment for the aerospace sector in the United Kingdom is currently in a
strong position and this trend looks set to continue.
Null Hypothesis (H1):
The aero-engine industry within the United Kingdom is in a poor state and the future for
the associated organisations is limited.
36
Hypothesis 3:
Alternative Hypothesis (H0):
The aero-engine manufacturer, Rolls-Royce, significantly improved their overall business
when they incorporate technological advancements, with specific reference to Data
Systems and Solutions.
Null Hypothesis (H1):
The aero-engine manufacturer, Rolls-Royce, develops no additional benefit from
incorporating technological advancements such as those associated with Data Systems and
Solutions.
37
Justification
The hypotheses presented above aim to develop questions which will further improve the
current understanding of the aerospace industry, with specific reference to the aero-engine
sector within the United Kingdom. The UK currently has a successful aerospace industry,
however it is dominated by one major organisation - Rolls-Royce. The importance of this
firm has become crucial and so has the complex network of supporting firms and
industries which have developed.
This investigation will develop a clear insight into global market trends that have been
seen and also those which are predicted for the future. In addition, the study will focus on
the present situation found within the United Kingdoms aerospace industry. A clear and
complete presentation of the aerospace environment is not available within the current
literature and therefore it is important to provide a complete insight into this sector.
In relation to the aero-engine industry, there is the constant requirement to continually
develop and advance the products and services provided. In recent years the main change
has involved the integration of electronics. These have subsequently become integral to
any aero-engine and many ensuing advancements to the products have focused on this
area. Rolls-Royce has become a market leader and now utilises the technology in all of its
new engines. However, there is currently limited information in the present literature on
these systems and the benefits which arise from their incorporation. Therefore, Rolls-
Royce will be examined in detail to analyse these issues. In addition, the business
relationship between Rolls-Royce and Data Systems and Solutions (DS&S) will be
explored as a case-study to highlight the specific advantages which have been generated
from advancements of this nature.
38
Chapter 4
Methodology
39
Methodology
Research is a process of ‘knowledge production’ (Marshall and Rossman, 1999), through
which one seeks a greater understanding or discovery of new information on a particular
subject matter. In order for this to be accomplished, the process of data collection and then
data analysis needs to be completed.
In this investigation, the methodology that has been set out has been undertaken to
determine the validity of the hypotheses presented above. The analysis that is going to be
undertaken will be looking at the aerospace industry. The aero-engine sector of this vast
market plays a crucial role and it is this which will be researched in further detail. In order
to develop a critical insight into the core aero-engine market Rolls-Royce will be the
organisation investigated. Rolls-Royce is the second largest aero-engine manufacturer in
the world and one of the United Kingdom’s most important high-technology industries.
A complete analysis of the recent trends within the core sectors of the aerospace market
will be performed in order to establish a detailed understanding of the industry. It is
important to generate a comprehension of these factors in order to establish the potential
market movements for the future. The overall trends have influence upon all organisations
involved within the industry so therefore this analysis is crucial to the investigation and
will allow the first hypothesis to be assessed.
In order to gain a full understanding of the complex industry and to assess the second
proposed hypothesis there will initially be an analysis of the political, economic, social,
and technological (PEST) criteria which will provide an insight into the external macro
40
environment. These four PEST analysis factors are the core issues within all markets
across the globe and developing an understanding of these is crucial. This knowledge will
allow a comprehension of the current market and the position that UK organisations
currently occupy. To develop the analysis further, Porter’s Diamond Model (1990) will
also be applied. This will highlight whether the national advantage required for an industry
to be successful within a nation was present for the aerospace industry in the United
Kingdom.
To gain an understanding of the external industry environment, Porter’s Five Forces
Model (1980) will be utilised along with the Flagship Theory introduced by D’Cruz and
Rugman (1997). Through performing these examinations, one can develop a more
complete comprehension and deeper level of knowledge of the issues within the aerospace
industry.
The study is looking to understand the benefits of relationships developed by
manufacturers and external organisations within the aero-engine sector. One of the most
important is the understanding of interactions with electronics firms. The present day aero-
engine has become strongly integrated with electronics and the technology surrounding
such systems. In relation to these developments, Rolls-Royce has made some key strategic
decisions. One of these involved the development of Data Systems and Solutions (DS&S)
in a joint venture. This particular case-study attempts to highlight the impact of market
and firm advancements, the benefits of technological progression, along with providing an
analysis of the internal firm environment. Through analysing all of these factors it will be
possible to fully assess the third hypothesis which has been presented.
41
Incorporating a case-study enables a researcher to obtain information that will directly
relate to the hypotheses being investigated. One of the primary advantages is that an entire
organisation can be studied in detail with greater attention to detail (Zikmund, 2000). A
case-study on a single firm has been completed in this instance as it allows in-depth
research into a particular theory. It must be recognised that this process does not provide a
whole market analysis, however for this specific investigation broad and wide-ranging
information is not a core requirement. This single case-study on Rolls-Royce has been
deemed sufficient to provide the necessary understanding required to assess the
hypotheses presented.
In order to gain access to primary data for the aero-engine industry, two semi-structured
interviews were undertaken with employees from Rolls-Royce. This type of primary
research enables a way of collecting and analysing specific research information. It must
be emphasised however, that interviews only provide a limited degree of knowledge. This
limit is dependent upon the level of knowledge the interviewee possess and also, the
quantity that they are willing to divulge (Cassel and Symon, 2004). Although interviews
can provide useful information and data, the factors mentioned above must be taken into
consideration. The interview must therefore be approached in a manner that allows
maximum benefit to the investigation.
When using the semi-structured method, pre-set questions are developed however, there is
a degree of flexibility which allows for a less autocratic interview process. This method
ensures the interviewee remains focused on the issues being presented, but is free to
provide other potentially useful information (Cassel and Symon, 2004). In this
investigation, the semi-structure technique was utilised as the conditions meant that it had
42
the possibility of providing the most significant results. In relation to this decision, it was
felt that a structured interview would be too rigid and not allow for a flowing session,
whilst an unstructured method may not provide the scope and detail of information
required to complete a successful analysis.
Both of the interviews undertaken for this project were completed in private and on a one-
to-one personal basis which lasted approximately 25-30 minutes. These private sessions
allowed for greater interaction between both parties involved.
The interviews which were arranged by a third party contact, were undertaken to gain an
insight into the business environment, develop further knowledge not currently in present
literature, and also attempt to acquire specific data for the desired research topic.
However, during the interviews, both persons involved expressed concern over the
possibility of releasing confidential information and for this reason requested that the
interview was not recorded and that they remain anonymous.
The first interview with Contact A (2006), was completed on the 4th August 2006, with the
interviewee being a manager within a specific business team. This employee of Rolls-
Royce had previously spent several years overseas again working within the aerospace
industry. Throughout the interviewee’s career, a full understanding of many aero-engine
models and their integrated systems had been developed. The interviewee’s current
position required this knowledge in order to allow effective management of specific
business issues. This diverse knowledge subsequently proved very useful to this
investigation.
43
The second interview with Contact B (2006), took place on the 7th August 2006. The
interviewee (Contact B, 2006), supported the Data Systems and Solutions (DS&S)
division of Rolls-Royce. The interviewee had a facing role involved in DS&S operations
in relation to Rolls-Royce engines. Within the organisation, information from this division
is analysed and delivered to the relevant personnel involved within engine management.
This interviewee was able to provide useful information about DS&S and the role which it
plays within the aero-engine sector of Rolls-Royce.
In order to further support the investigation, secondary data is also going to be
incorporated into the analysis. Secondary sources represent information that has been
collected for other investigations. As this data has already been collected by a third party,
there is a reduction in both cost and time. It is important however, to understand and take
into consideration the overall relevance of this type of data to an investigation. Data of this
nature may have been collected and/or analysed incorrectly, may have become outdated
since publication, or may not correlate to the present research (Cassel and Symon, 2004).
Secondary data however, can prove to be an extremely useful tool for analysis. It can
provide a much wider scope and depth of information than primary data collection whilst
allowing for a much greater understanding of industrial or market trends (Hyman, 1987).
For this investigation, secondary data from related research topics within the current
literature will be utilised. In addition, documents in the form of reports, publications and
academic journals will be incorporated in order to further develop the level of analysis.
This will allow for the hypotheses presented to be fully understood and analysed in a
method which will permit the most accurate conclusions.
44
This particular methodology has been developed to provide the most significant analysis
and results to the overall study. The techniques stated have been incorporated into many
academic research articles which analyse specific areas within an industry. In relation to
the aerospace market, the literature highlights the use of empirical analysis which is often
linked to anecdotal evidence from interviews and a subsequent case-study of a specific
organisation (Bonaccorsi, Giuri, and Pierotti, 2001; Prencipe,1997). This technique has
been used in the examination of many research fields including the direct analysis the
aero-engine sector (Prencipe, 2004). The literature concludes that this type of analysis
process can be extremely useful and successful when undertaken to evaluate a specific
investigation.
Overall therefore, this methodology is appropriate for developing accurate conclusions to
the hypotheses that have been generated for this investigation. All of the data collected
during the study and the resulting analysis will allow for a clearer understanding of the
issues raised.
45
Chapter 5
Analysis
46
Analysis
In order to complete an accurate and detailed analysis of the aerospace industry, it is
important to look at the recent trends which have been seen. Understanding the past trends
places the current situation into perspective and also provides the opportunity to predict
what the future potentially holds, a factor which is crucial for all organisations involved
within this market.
Market Trends
In 2005, the turnover value for the world aerospace industry was valued by the AeroSpace
and Defence Industries Association of Europe (ASD, 2004) at €203 billion. Datamonitor
(2006) has estimated that global aerospace markets will grow in the following years at an
average rate of 4% per annum. Utilising these predictions it can be estimated that the
aerospace market in 2006 will be worth over €210 billion, with a continuing growth trend
after this period.
Within the aerospace industry there are two core markets. The largest is that of the United
States which has long been the frontrunner. In 2000 the country accounted for 49.3% of
the market (ASD, 2000). By 2004 this value had fallen slightly to 45.2%, or just over €88
billion (ASD, 2004), but the United States still dominates. The main determinant of this
massive market share is the sheer size of the domestic market, with over half the world’s
air traffic being conducted within this single nation (House of Commons - Trade and
Industry Committee, 2005).
47
The second largest aerospace market is the European Union (EU) which accounts for
seventeen national aerospace industries. In 2004, the EU accounted for 39.4% of the world
market, up on 2000 by 5.6%. However, this region is dominated by several core nations
which are the United Kingdom, France and Germany.
Currently, the aerospace markets are dominated by organisations within the more
economically advanced nations such as those presented above, but there is increasing
activity in many of the emerging economies around the globe. Although at present these
are recognised as, “indigenous to their national aerospace industries”, it is expect that in
the near future they will have a major influence upon the international market (House of
Commons - Trade and Industry Committee, 2005).
- Civil Aerospace
The civil aerospace industry can be strongly correlated to trends seen within the airline
sector, as these organisations are the main customers of the products and services. In turn,
the airlines themselves are heavily influenced by the demand for air travel that is
generated from within the global population. In addition, organisations involved within air
cargo are another key component within the civil aerospace market. The air cargo sector is
governed by the same rules and regulations of passenger airlines and the products and
services utilised are almost identical.
Like many markets around the globe, civil aerospace is cyclical in nature. This has
developed due to the inter-relationships that are present between aerospace firms, airlines,
and the general public. The trends that result can be closely related to characteristics
48
Civil Aerospace Industry Turnover - European Union
0
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within the global economic environment, with financial implications recognised as one of
the central determinants (House of Commons - Trade and Industry Committee, 2005).
Figure 7 highlights the recent turnover levels of the civil aerospace industry within the
European Union. The trends seen within the EU were also present across the global
aerospace market as all are strongly influenced by the same determinants.
From 1980 to 1992, the business environment was undergoing a period of strong and
continuous growth, with turnover rising by just over 170% (ASD, 2004). However, the
industry followed its cyclical nature from 1992 to 1995 where turnover within Europe
collapsed by 31.3%. The main cause of the trend reversal was the overall slow down in the
global economic environment. However, after the three years of decline the markets again
recovered with further growth of 113% between 1995 and 2001.
Figure 7: Civil Aerospace Industry Turnover - European Union (ASD, 2004)
49
In 2001, the world economies were performing at ever increasing levels, with the markets
and organisations reaping the benefits. This is represented in the analysis of the European
civil aerospace industry, which from 1999-2000 and 2000-2001 saw growth rates of 11%
and 8.8%, respectively. These levels saw turnover rise from €46.7 billion in 1999 to €56.4
billion in 2001 (European Aerospace Industry (EAI, 2000: 2001: 2002), a trend that was
predicted to continue across the global market.
However, in 2001 the civil aerospace market entered into a period of sudden recession. As
the cyclical model referenced above highlights, the main determinant of this change was
the rapid and unpredictable decline in the world economy. The main causes of the
problems seen were several high profile events including the outbreak of SARS (Severe
Acute Respiratory Syndrome), conflict across the Middle-East, increasing oil prices and
also the terrorist attacks in the United States. The combination of all these incidents led to
a downturn in the global economy with all industries being adversely affected. In
particular, the civil aerospace market was significantly influenced due to the use of aircraft
in the terrorist attacks on the 11th September 2001.
The potential threat for further activities of this nature was widespread and as a result,
there was a massive collapse in the demand for air travel. The International Air Transport
Association (IATA, 2006) recorded an all-time high of passenger travel in 2000 with
nearly 1.7 billion. However, for 2001 this value fell by 100 million passengers, resulting in
a drastic negative impact upon the airline industry and subsequently the civil aerospace
industry.
50
In 2001, the airline industry alone saw net losses of $13 billion. In contrast the same
industry was making a net profit of $8.5 billion in 1999, highlighting the impact that the
events of 2001 had upon business. A consequence of this was the collapse in the value of
the civil aerospace market. Data from the ASD (2004) highlights that European civil
aerospace industry fell in value by 9.6% in 2001-2002, followed by a further reduction in
2002-2003 of 3.5%. This degree of change in such a short period of time emphasises the
unpredictable nature of the industry. It is therefore crucial for businesses to be aware of
these potential changes and take into account the risks of similar fluctuations in their
future business strategies.
Although the events seen throughout 2001 had a drastic influence upon the civil aerospace
markets, the trend reversed in 2004 with growth of 3.5%. Even though the threat of
terrorist activity still remains, conflict is still commonplace, oil prices remain high, and
many global threats are still a possibility, the aerospace industry has still continued to
develop. These issues, especially that of terrorism, have gradually integrated themselves
into present-day ideologies and become another part of modern society. The shock of 2001
massively influenced the global economies as it was the first major incident of its type.
However, the economic impacts have now been overturned and the general public have
become accustomed to the issues that they represent.
The result of these changes has been the return to rising passenger levels and increasing
demand for domestic and international flights. After 2001, passenger numbers began to
recover with strong and steady growth. Over the period 2003-2005, passenger numbers
rose by almost 25% to over two billion. This trend can be correlated to the ever increasing
passenger demand and also to stronger than expected economic performance in the United
51
Kingdom, Japan and many other emerging economies (IATA, 2006). For 2006, IATA
(2006) predicts that passenger numbers will rise to 2.2 billion and the growth trend is
expected to continue. However, even though positive trends are being seen it must be
recognised that the airline sector is still undergoing recovery. Net losses of $3.2 billion
were still present in 2005, sustained mainly by the ever increasing cost of oil which now
accounts for 22% of total operating costs (IATA, 2006). It is predicted that it will take
many more years before net profits are again viable within this industry. However, in
August 2006 the potential for further terrorist attacks was realised when plots to destroy
trans-Atlantic airlines between the United Kingdom and the United States were thwarted.
This instability highlights the issues which modern businesses, especially those involved
in the aerospace markets, have to overcome.
In conjunction with passenger travel, air-cargo levels also fell with a decline in operating
levels of 7.7% from 2000 to 2001. This sector also endured a prolonged struggle to
recover as sale volumes remained at their depleted levels 2001-2003. Although the cargo
industry is not as valuable as passenger travel, the financial implications for all the
associated industries were severe. However, freight levels eventually began to recover
with sales rising by over 27%, from 29 million tonnes to nearly 37 million tonnes,
between 2003 and 2005 (IATA, 2006). This positive trend is expected to continue at 7%
per annum, driven by the ever increasing levels of international trade (IATA, 2006).
Overall therefore, the civil market has overcome the issues of recent years and is presently
in a period of growth. Currently this is predicted to continue (ASD, 2004) however, the
cyclical trends of the industry are difficult to predict and therefore, organisations must be
prepared for any eventualities that may arise in the future.
52
EU Aerospace Industry Turnover Percentage - Civil/Military
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Civil Military
- Military Aerospace
The military sector is a vital and important division within the aerospace market. In the
early 1980’s turnover attributed to military sources accounted for over 67% of the total
European market and was therefore, a key factor in the early growth and development of
the industry.
As figure 8 highlights, the significance of the military sector in economic terms has
gradually reduced since the 1980’s and was overtaken by the civil sector in 1990. By 2004
military turnover accounted for only 35.6% of the aerospace market, worth €27.4 billion.
During 2000 military levels reached an all time low of 29.1% and although there has been
some recovery as a result of recent global issues, the divergence is predicted to continue
(ASD, 2004). Even though this is the case, the military market is substantial in value and
will therefore remain a very significant world market.
Figure 8: EU Aerospace Turnover Percentages - Civil/Military (ASD, 2004)
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With Europe being the second largest aerospace market, demand for the products and
services developed in the region not only comes from internal Government sources but
also from other nations across the world, classified as military exports. As a consequence,
the turnover trends that are presented provide a general global trend for military
expenditure.
Figure 9 shows the value of turnover from military sources from 1980 to 2004. Although
fluctuations are present, these are much less severe than those seen in civil aerospace.
There are no clear patterns or cycles as change is not determined by world-wide economic
performance, but is dependent upon defence budgets and the procurement policies of
Governments. These in turn are influenced by the geopolitical developments and the
changing perception of threats across the globe (Bechat et al., 2002).
From 1980 to the 1987 the military turnover saw a trend of general increase, with total
levels within Europe reaching highs of nearly €35 billion. This trend was seen due to the
issues over the cold war. Political tension between the Soviet Union and the United States
spread and the result was an increase in defence budgets as nations attempted to protect
themselves through military development. When this era finally came to an end in the late
1980’s defence budgets subsequently, and EU turnover dropped to €22 billion per annum.
From the mid-1990’s onwards, the military turnover within Europe has fluctuated
however, on average it has remained at around €24 billion. The variations that are
highlighted in figure 9 have been determined by political unrest and other international
issues. The recent rise has been attributed to terrorist activities and the rising demand for
homeland security.
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Military Aerospace Industry Turnover - European Union
0
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Figure 9: Military Aerospace Industry Turnover - European Union (ASD, 2004)
Over the forthcoming years the Department for Trade and Industry (DTI) for the United
Kingdom, stated that defence budgets in many European nations, including the United
Kingdom, were set to enter a phase of decline. However, between 2005 - 2009 the United
States defence budget is expected to increase by approximately 30% (DTI, 2006). The
consequence of such changes will have an impact on many of the organisations within this
business environment, so it is important for organisations to be prepared. There are many
commonalities between the civil and military segments of the market and it is essential for
the industry to have a degree of predictability and stability in both areas. Having such
information allows for firms to, “make best use of the knowledge bases, to optimise
technical, human and financial resources, and to iron out fluctuations in demand when
either segment encounters periodic difficulties” (Bechat et al., 2002).
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- Aero-Engine Industry
The aero-engine industry within Europe accounts for 9% of the total consolidated turnover
or, nearly €7 billion. This value is dependent upon both the trends seen within the civil and
military aerospace industry across the globe. The sales of engines are correlated to the sale
of aircraft, whether for commercial, personal or military use. However, with general trends
within the United States and the United Kingdom highlighting growth in all engine
sectors, the industry is currently in a strong economic position (House of Commons -
Trade and Industry Committee, 2005; AIA, 2005)
Across the globe there are three main aero-engine manufacturers that dominate the
business sector: General Electric (US), Rolls-Royce (UK), and Pratt and Whitney (US).
Although these firms develop the final product, there is a vast and complex network of
businesses which supply and support these international organisations. The relationships
that are developed and the subsequent high-technology products which are produced are
becoming an increasingly significant industry.
Within the United Kingdom the Aerospace Industry (UKAI) is realised as one of the most
important manufacturing industries. It provides £17 billion to the economy whilst also
providing the ‘spill-over’ effects to many other business sectors (House of Commons -
Trade and Industry Committee, 2005). At present, the Society for British Aerospace
Companies (SBAC, 2006) estimates that in the UK there are over 3,000 companies
integrated into the aerospace industry. Currently the most successful of these firms is
Rolls-Royce. In 2005 revenue that was attributable to the civil and defence sectors stood at
£4.9 billion. (Rolls-Royce, 2006a). In addition, the total book value for engines already
ordered for forthcoming years stood at £20.7 billion, driven by the increasing sales of
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aircraft. Such figures show that the business is currently in a period of success and this
trend is predicted to continue for the foreseeable future.
In conclusion, all of the sectors within the current aerospace industry have been through
their recent problems and difficulties but they have been able to overcome these and
develop into more successful business environments. The firms which operate within them
now have the potential to take advantage of this situation and become increasingly
successful.
More specifically however, the aero-engine sector plays a crucial role within the aerospace
industry across the globe. For this reason, it is important to understand the environment
within which they operate and also how the firms involved have continued to remain
competitive and successful in an ever-changing market. The following analysis will
attempt to further understand these issues and allow for the second and third hypotheses
presented for this study to be assessed.
Business Environment
- External Macro Environment
In order to provide a detailed analysis of the aero-engine market, the external macro
environment and external industry environment of the aerospace industry will be initially
investigated, followed by an analysis of the internal environment. This will provide a
detailed insight into the present situation within this vital market segment. In order to gain
this knowledge numerous models and techniques will now be applied which will allow for
a comprehensive insight and enable a thorough investigation to be completed.
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Specifically, the United Kingdom will be focused upon due to the importance of this
industry and its influence upon the economic and technological aspects within the nation.
As a case-study, the core organisation within the United Kingdom and the second largest
aero-engine manufacturer, Rolls-Royce, will be utilised. A case-study based analysis
enables a detailed approach to the investigation, upon which specific data can be gathered.
PEST Analysis
A PEST analysis can be used in order to analyse all areas of an industry and the
environment within which businesses operate. This type of analysis takes into
consideration the political, economic, social, and technological issues. It provides an
overview of the current situation within a particular market and can be extremely useful
for firms operating within the sector.
A PEST analysis will now be completed for the aero-engine industry in order to highlight
the present situation for this particular market. It will provide some background
knowledge whilst also showing the future trends that the firms may face. Utilising this
method in relation to the Rolls-Royce case-study, enables a core from which the integral
factors can be more clearly depicted.
Within the aero-engine industry there is a strong political influence upon the nature of the
business environment. Not only are Governments a source of demand for military
products and services, but they also have a strong influence upon critical market
characteristics.
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From a non-financial perspective, the development of the Society of British Aerospace
Companies (SBAC) within the United Kingdom has been critical. This is the main
governing body and representative organisation within United Kingdom and has strong
influence both within the industry and Government. Having this over-riding body
improves the functioning of the aerospace firms which is extremely beneficial.
In addition, two further politically based bodies which have been developed have become
central to the UK aerospace industry: Aerospace Innovation and Growth Team (AeIGT)
and the National Defence and Aerospace Systems Panel (NDASP). The AeIGT was
launched in 2002 and includes representatives from the Government, industry and other
stakeholders. Its main aim is to secure agreement between the Government and industry
on shared vision and strategy for the future (SBAC, 2006). The NDASP also formed in
2002 incorporates key personnel from the Government, academia, industry, and trade
associations, to ensure that the sector is prepared for future challenges. It drives to acquire
development and funding, and has set up National Advisory Committees that bring
together experts in advisory roles.
Support for the aerospace industry in the United Kingdom is taken further with high levels
of financial funding from numerous bodies. The Government is one of the core sources,
with Department for Trade and Industry (DTI) taking responsibility for these issues. The
Government has stated its intent and desire to continue the support which it offers the
aerospace industry companies. The procurement policies that are in place aim to support
the firms’ development, as this sector has been highlighted for its crucial role that it plays
within the United Kingdom’s economy.
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Since 1997, nearly €1.4 billion has been invested in Airbus and Rolls-Royce with the
indirect benefits subsequently filtering into other firms associated with these industries. In
2005-2006, the funding from the DTI stood at over €500 million (DTI, 2006) However, in
addition to this there were extra financial sources such as the science budget which stood
at €145 million last year (DTI, 2006). This funding has been put in place to stimulate
innovation and knowledge transfer, whilst also enhancing the nations overall
competitiveness on an international scale.
Due to the long-term vision of the UK Government and its desire to ensure the success of
this industry, there have been many other forms of support which have arisen. These all
aim to improve the business sector, from extra funding to the development of new
technologies:
• SBAC Competitiveness Challenge
• National Research Support (NRS)
• Aeronautics Research Programme (ARP)
• Defence Science and Technology Laboratory (DSTL)
• Engineering and Physical Sciences Research Council (EPSRC)
• Defence Aerospace and Research Partnerships (DARPS)
• QinetiQ
Not all of the funding in the United Kingdom is directly linked to Rolls-Royce however,
with the company being the largest firm in the aerospace sector, it does benefit from much
of the support. Rolls-Royce can take advantage of this and utilise it in order to remain a
focal organisation within the aerospace sector.
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In an analysis of the financial and non-financial support, Alfredsson and Hildingson
(2003) found that the degree of funding present in the UK was not found in any other
European nation. Although there are examples of both financial and non-financial
assistance, many of the countries lacked the pronounced support from their respective
Governments.
Rolls-Royce also benefits from a stable democratic Government within the United
Kingdom. In addition, similar systems are in place in areas where Rolls-Royce has
invested heavily such as the United States and Germany. Although there is always risk
associated with business this is reduced somewhat by the political stability.
The economic issues can significantly influence any business enterprise, including Rolls-
Royce. Issues such as inflation, taxes, interest rates, and exchange rates are all key
indicators which must be tracked. In many developed nations these are often reasonably
stable due to the controlling effects utilised by many central banks. This is most beneficial
as it provides a secure base to work upon. However, Rolls-Royce does have operations
across the globe and some locations are subject to fluctuations in these economic indices.
Due to this it is crucial to understand and plan for any potential fluctuations that could
occur in the future.
One of the major issues is the foreign exchange risk that develops from Rolls-Royce
undertaking all business within US dollars. Exchange rates in this currency do change over
time and this will not only impact Rolls-Royce but also many of its customers. The firm
must take this into consideration when looking at the economics of the business. It does so
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through monitoring the changes and protecting against any unforeseen fluctuations which
may negatively affect the firm’s financial situation.
Although the social issues of this analysis are somewhat subjective, one of the major areas
is the rise in global demand for aero-engines. Although there are risks present, such as
those presented from recent terrorist activities, there is still continuing growth in passenger
travel and air cargo transport. In addition, the industry is in a period of sustained military
demand. As a result, the need for aircraft and subsequently engines continues to rise.
The growth trend in passengers is being driven mainly by emerging economies, such as
China, India and other south-east Asian countries. Air transport is now becoming
integrated into many cultures as the desire to travel becomes more prominent within all
societies across the world. This global aspiration is a positive development for Rolls-
Royce as it allows for future growth and success within the aero-engine manufacturing
sector.
The complex products and the knowledge required to manufacture the systems involved
within aero-engines, make the business environment a competitive and difficult market in
which to succeed. Due to this, technology has become a crucial factor in ensuring the
competitiveness of a firm. Rolls-Royce, through many years of experience along with
research and development has reached the forefront of technology. Being in this position
has allowed them to remain successful in this particular market.
Since 2001, Rolls-Royce has invested over £1.5 billion into research and development
programmes which aim to keep them on the technology frontier. This investment is
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focused both internally on core technologies and competencies and, externally in
collaborative projects such as University Technology Centres. Although this is significant,
the firm also has strong support from other sources. The long-term political backing of the
industry has continued to drive development in the area of technology. There are now
many supporting projects including the Defence Science and Technology Laboratory
(DSTL), Aeronautics Research Programme, National Advisory Committees, and QinetiQ,
all of which assist and advise in technological research. All of these systems allow for new
technological development which has become so vital for the future prospects.
In conclusion, analysing the political, economic, social, and technological issues
associated with the aero-engine industry, it is obvious that the current position with the
United Kingdom is very promising. Rolls-Royce and also other related organisations have
a strong underpinning base and a high level of support. The most important factors are the
political backing which is currently present and also the continuing global rise in demand
that is being seen for products of this nature.
It is also important to highlight that Rolls-Royce has been able to achieve its current level
of success through combining a suitable strategy which takes into account the strengths
and weakness of both the organisation and the surrounding environment, whilst also
taking into account the opportunities and threats which are present. This has greatly
benefited the firm who continue to ensure that these factors are taken into consideration.
Although the aerospace market is cyclical in nature and will potentially at some point in
the future see a decline, the overall general trend is one of growth. In addition, the industry
in the United Kingdom is in such a position that if a decline is seen, the main firms present
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will be able to deal with such issues on a short-term timescale. Long-term investment has
also been secured from the Government and other external sources which will further aid
the potential for international success.
Porter’s Diamond Model
Porter’s Diamond model (1990) aids in explaining why the aerospace industry has become
successful in the United Kingdom, especially with the achievements of the aero-engine
manufacturer Rolls-Royce. This analysis further develops the PEST factors that were
examined previously, giving a more detailed understanding of the industry.
The factor conditions within a nation focus upon production. When Rolls-Royce first
began its development of aero-engines in the early twentieth century, the firm could not
benefit from the globalisation of resources that is present in today’s business environment.
Therefore, in order to become successful the correct characteristics had to be present.
There was a wide range of labour available from manual workers to highly skilled, well-
educated personnel. Porter stated that a diverse workforce which contained a range of
knowledge and skills was critical to the success of an industry. Also available within the
United Kingdom at the time was a well developed infrastructure, along with sources of
both capital and natural resources, which were again emphasised as crucial to the
development of a national advantage. All of these aspects were utilised during the early
development of the aerospace market, especially by Rolls-Royce. In addition, the UK had
the resources and capabilities which enabled ‘factor creation’ a characteristic which
differentiated the nation from many others and subsequently enabled many industrial
sectors to establish themselves.
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Demand within the national market was the source of early development for Rolls-Royce.
The presence of local customers allowed for the initial growth of the firm. This was
propagated further through the increasing military demand which became more significant
throughout World War II. The early demand from customers for the aero-engines drove
Rolls-Royce into producing products of higher standards which improved the levels of
reliability, durability and sophistication. This was possible through continuous innovation
and research which later enabled the firm to compete on an international level with similar
organisations located in other nations.
In more recent times the national demand has remained a significant benefit for Rolls-
Royce, with a vast airline sector and also the military, requiring the products and services.
Rolls-Royce is now a premier multi-national firm and as a result of the early demand
conditions, can now compete successful within the international market.
The presence of a strong network encompassing related and supporting industries,
provides firms with further ability to compete internationally. Benefits that can arise
include improved communication, exchange of ideas, and innovation. Competition
between suppliers can improve quality whilst reducing costs and also, encourage the
development of close relationships between firms, suppliers, and related industries that
can help organisations attain global market leadership.
Due to the complexity of the aero-engine and the number of components required for the
final product, these issues are amplified. However, throughout the industry’s introduction
within the United Kingdom and its subsequent growth, the required network of external
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factors has been present. This has greatly benefited the firm to date and will continue to do
so as long as this remains in place.
In relation to the strategy and structure of Rolls-Royce, the firm has been able to develop a
successful system. Over the years the company has undergone numerous restructuring
periods mainly as a result of economic decline and the subsequent fall in demand.
However, the firm initially grew from a car manufacturer of the same name, which had
been extremely successful in its particular field. Here, the required rivalry had given the
firm the knowledge and expertise to become a strong organisation, a characteristic which
was transferred into the aero-engine division. This has enabled the firm to become
competitive against international rivals and continue the innovation and development
which is so essential in this high-technology market.
From the analysis which has been undertaken, it is clear to see that the United Kingdom
provided a significant national home base advantage to the firms that were initially present
within the aerospace industry. The interactions of these four categories particularly
benefited Rolls-Royce, due to the extensive network that developed around the firm which
supported its initial growth. Many of these crucial characteristics are still present within
this industry today, which has been strengthened further by the support of the national
Government.
Although Porter’s Diamond model has received some criticism (Pauly and Reich, 1997;
Rugman and Verbeke, 1993; Davies and Ellis, 2000), the model does provide a strong
relationship between the United Kingdom national base advantage and success for
aerospace organisations. It highlights that the conditions present within the nation
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throughout the industry’s growth has provided the characteristics required for success on
an international scale.
- External Industry Environment
Porter’s Five Forces Model
In order to further analyse the external macro environment for the aero-engine industry the
Five Forces model developed by Porter (1980) will be used. This particular model is able
to provide the most accurate results when an industry displays the characteristics of being
well-established, stable, and in a period of steady growth, factors which currently describe
the aero-engine market.
In terms of competitive rivalry, the aero-engine market is dominated by three main
organisations, General Electric, Rolls-Royce, and Pratt and Whitney. This oligopolistic
industry is not controlled by a specific firm which in turn helps drive its competitive
nature. The market itself is governed by advanced technology which demands both high
investment and research and development.
The primary market for the sale of engines is intensified further through the link to the
secondary market sales of parts and servicing. Although the secondary market does have a
higher number of firms with the introduction of specialist maintenance organisations, sales
of engines is strongly correlated to further contracts for secondary services (Contact A,
2006). The aero-engine manufacturers have been able to retain much of this market due to
the development of electronics within engines and the introduction of data analysis
techniques. This enables schemes such as power-by-the-hour, which external
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organisations find difficult to compete against. As a result, the importance of sales and the
level of market share have continued to increase the level of rivalry, a trend which looks
set to continue.
Aero-engines are now classified as a mature product, thus limiting the potential for
technological differential change. Although advancements and changes are made, much
focus has now shifted to customer services. Relationship marketing has become central to
many of the firms’ tactics in which they aim to develop strong relationships with the
customer. A much more complete service is now provided along with a quality product.
The power of the buyers within this market are relatively high, brought about due to the
limited number of customers and also, the increasing levels of global carriers within the
airline industry. Aero-engines are a long-term product and therefore, securing a sale
ensures further interaction for many years. If a potential engine sale is lost to a rival, it
could be over a decade before that relationship ends. However, the organisation that
secures the contract is ensured long-term interaction and often future business follows. It
is therefore crucial to capture any potential customer at the earliest opportunity.
On the other hand, the power of the suppliers if often limited. The aero-engines are
developed from many components which range in price. Most of the suppliers are small
organisations and within their individual marketplace face strong competition. These
competing firms allow aero-engine manufacturers to undertake dual sourcing strategies
and benefit from the reduction in overall costs. This places the aero-engine manufacturer
in control whilst the individual suppliers lose their pricing power. However, those firms
that develop core equipment such as electronic control systems, are limited in number due
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to the resources and levels of investment required, which minimises competition. This
subsequently increases their power and influence, and thus higher costs are potentially
incurred by the purchaser.
The threat of entry into the aero-engine industry is minimal. The level of investment
required to enter the market is extremely high and competing against the already well
established organisation would be difficult. The three core firms have been operating in
the business environment over many decades and gradual development over this time has
enabled them to reach the positions they hold today. A newcomer would find it costly and
technically difficult when trying to replicate these firms. Another key area is reputation,
which needs time and success to develop. Rolls-Royce, General Electric and Pratt and
Whitney all have this important factor and rivalling them in this area would be almost
impossible.
At present, there is almost no threat from substitutes within this particular market.
Although there are several smaller organisation involved in aero-engine manufacturing,
the three main organisations currently look set to retain their high market share. Although
other methods of transport always offer some threat to the aerospace industry, the current
growth trends within the airline sector and military demand from global Governments,
highlight a potentially secure future for the aero-engine industry. The vast research and
development that is undertaken by all the firms involved guarantees technological
knowledge is continually improved, a process which attempts to ensure they remain
successful well into the future.
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The incorporation of Porter’s ‘Five Forces’ criteria has highlighted that the aero-engine
market is in a strong position. The three main firms involved within the sector and also,
many of the smaller outfits, have seen success over the past and the current analysis
highlights the potential for a lucrative future.
The importance of Porter’s criteria has been identified within many organisations. Rolls-
Royce is an example of a firm which utilises the information as it enables the development
of a clearer understanding to all of those (Contact A, 2006). Contact A (2006) stated, “the
system allows for the workforce to respond to the changing role of the business over time,
a process which is crucial in the continuing development of the firm”. The modelling of
industrial characteristics helps develop a better understanding and therefore, the
opportunities and threats can be dealt with in the appropriate manner.
Flagship Theory
The Flagship Theory published by D’Cruz and Rugman (1997) was meant to oppose
traditional ideologies such as those developed in Porter’s Five Forces model (1980).
However, both of these theories can be correlated to the aerospace industry within the
United Kingdom. In relation to the Flagship theory, the core firm involved is Rolls-Royce.
This organisation displays all of the characteristics which define what a flagship is and
how it should operate within its market.
Being the largest aerospace organisation within the United Kingdom, Rolls-Royce has the
leadership and strategic traits that are required to lead the host of supporting organisations.
It has developed relationships with its core suppliers and consumers along with non-
business groups including the Government, academic and research institutions, and trade
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groups. This strong position has enabled the firm to take control of the industry,
incorporating those around it which are of most importance. In addition, it has also
undertaken numerous partnerships with a whole range of businesses, including
competitors, in order to generate the greatest level of success for itself and ultimately
those which rely upon the firm.
These features fit Rolls-Royce into the Flagship firm role, a position which brings greater
responsibility. The demands on the firm and the pressures to succeed are ever increasing.
However, Rolls-Royce is currently achieving its targets and as a result is significantly
benefiting all of those associated with the business.
- Internal Environment
In order to analyse the aero-engine industry in detail, it is vital that one manufacturer is
focused upon. In this investigation the internal environment for Rolls-Royce will be
examined as a case-study, providing a core insight into this important market.
Business Relationships - Rolls-Royce
As the aero-engine industry involves the development of complex product systems which
incorporate thousands of components, the end line manufacturers such as Rolls-Royce
need to utilise both their capabilities and resources along with those of other organisations.
The processes of both outsourcing and vertical integration have been successfully
incorporated into the business strategy of all aero-engine manufacturers, including Rolls-
Royce.
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The company has utilised both methods successfully over the past twenty years, with the
percentage share over this period remaining constant (Prencipe, 1997). In the early 1980’s
Rolls-Royce undertook the design process independently, after which the products would
go into production through the contracted organisations. However, in more recent times
Rolls-Royce has incorporated external firms in a more wide-ranging role. They now
participate in the design stages, testing and final manufacturing. This enables a better
quality product to be developed and ensures that all parties understand what is demanded
of them in the manufacturing process (Contact A, 2006).
In light of the literature on outsourcing and vertical integration strategies within complex
product systems, it is vital that Rolls-Royce make best possible use of all the resources and
capabilities that are available. The firm must decide on what the core activities/products
are, and then these should be complete ‘in-house’. Within the aero-engine, these main
areas are linked to the ‘inner core’ and are represented by the fans, compressor, turbine
systems, and combustor. In addition, the technical products are maintained including
impellers, combustor product generators, and fluid handling (Prencipe, 1997). Each of
these is a significant part of an aero-engine and their performance is strongly related to the
success of the whole engine. Rolls-Royce has continued to develop these within its own
plants and where necessary, has completed vertical integration methods to ensure that
these processes remain under their design and manufacturing control, rather than
outsourcing to other organisations.
The ‘outer core’ division on the other hand contains components and subsystems that have
a marginal role in the economy of the entire system and includes joint couplings,
lubricating systems, nacelles, nozzles, and sealing devices (Prencipe, 1997). The majority
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of these products have been outsourced to a wide range of firms by Rolls-Royce. Even
though this is the case, analysis highlights that patents are still being issued to the
company in these areas. This has been driven by the extensive research and development
undertaken in all of these fields which is completed so that the firm is an ‘intelligent
customer’ and remains knowledgeable on all associated issues (Contact A, 2006). Through
this process they maintain either full design capability or at least an acceptable system
integration capacity which is vital for a successful final product.
The importance that Rolls-Royce places on new technologies in order to secure future
success can be seen through the analysis of patents. Prencipe (1997) has shown that since
1978, there has been a continued rise in the number of patents registered to the company.
Between 1989-1993 a total of 332 patents were issued in the United States, of which 28
were in new classes. This degree of innovation is a necessary requirement to keep Rolls-
Royce competitive within the aero-engine market.
Rolls-Royce undertakes extensive research in all areas of its business, with a large
majority occurring ‘in-house’. However, since the 1960’s the firm has funded University
Technology Centres (UTC’s) within the United Kingdom which now account for over
70% of external based research (Contact A, 2006). Some examples of ventures into
universities include composite based analysis at Oxford, Swansea and Birmingham, along
with research of software technologies at York and Sheffield.
One of the most significant developments over the recent past has been the integration of
electronics and software, in the form of Full Authority Digital Engine Control (FADEC)
aero-engines. Early developments were seen in the 1960’s with the Rolls-Royce Olympus
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which powered Concorde. Further advancements followed until Pratt and Whitney
released the first commercial dual FADEC engine, PW4000.
At the core of a FADEC engine is the Electronic Engine Control (EEC) which manages all
aspects of the engine. The digital nature of the system allows for accurate and precise
controls to be undertaken through a complex network of electrical signals. The
development of such engines has enabled further advancements and numerous benefits,
with greater efficiency, protection, safety, and integration with aircraft systems.
One of the most significant areas is the monitoring and diagnostic capabilities which are
possible due to the technological advancements. Electronic sensors and controls detect a
whole range of criteria including pressures, temperatures, speeds, and vibration levels. The
EEC is able to understand the data and information generated within the engine and can
make automatic adjustments to overcome any fluctuations. This component is at the core
of any FADEC engine and Rolls-Royce use Goodrich Corporation as its main supplier. In
2004 it chose Goodrich again for the Trent 1000 engine which will be powering the new
Boeing 787 Dreamliner. The contract for both original equipment and aftermarket sales is
worth $1 billion, highlighting the importance of this particular component (Charlotte
Business Journal, 2004).
Although the EEC is the main control unit, a further benefit to the electronic technology is
the external monitoring of the engine as a whole. From the EEC, all information is passed
through the ‘Aviation Communication and Addressing Reporting System’ (ACARS). One
division of this ACARS system is associated to a complete range of engine data analysis
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(Contact A, 2006). This is transferred to the relevant ground stations through either the
SITA or ARINC (Aeronautical Radio Incorporated) service providers.
The electronic systems within the engine ultimately provide organisations with a wide
range of information. This represents core data that can be extremely useful to
organisations involved within the maintenance of the product. However, problems arise
when trying to understand and decipher the continuous stream of facts and figures. Rolls-
Royce is the main organisation within the aero-engine industry that has moved into the
market area of information analysis. In 1999, they entered into a 50-50 joint venture with
the American firm Science Applications International Corporation (SAIC), forming Data
Systems and Solutions (DS&S).
DS&S provide a decision support service for a whole range of industries. For the aero-
engine industry, the company develops software which enables the collection and analysis
of data which has passed from the engine to the relevant ground stations. Here, the
products from DS&S enable organisations to better understand the information, with a
whole suite of services provided:
CoreAlert - engine health monitoring services
CoreFleet - aircraft reliability analysis and maintenance management
CoreFuture - planning and forecasting services
CoreRecord - technical records service
CoreWing - electronic technical log book
CoreWorkshop - electronic task card management
(DS&S, 2006)
75
All of these provide the customer with the potential to improve their business. CoreFleet
reduces delay and cancellations by up to 66% and has an estimated return on investment
of over ten times (Contact B, 2006). The diagnostic technology CoreAlert estimates return
on investment of three times whilst CoreWing can cut overall technology management
costs by 40% (Contact B, 2006). These are just an example of the benefits which
technological advancement can provide an organisation when they are successfully
integrated.
In March 2006, Rolls-Royce took the decision to vertically integrate the joint venture it
had developed with SAIC. The company had understood the importance of this particular
segment to their organisation and decided that protecting and developing it further would
be optimised if it were totally integrated. This wholly owned subsidiary has become a
crucial component of Rolls-Royce which the firm looks to take advantage of at all
opportunities.
Rolls-Royce in conjunction with DS&S has set up the Distributed Aircraft Maintenance
Environment (DAME), which develops a grid system that enables aircraft engine
diagnostics. It also provides a decision support service using analytical tools to identify
problems that are not directly identified by the internal software programmes. This is
beneficial as it allows for a complete overview and analysis of all aero-engines. Also, they
are currently investing in the Business Resource Optimisation for Aftermarket and Design
on Engineering Networks (BROADEN) which will look to advance the technology yet
further.
76
The utilisation of the DS&S systems allows for the efficient data collection, condition
monitoring, diagnosis, life cycle simulation, data visualisation and integration, and
subsequently analysis and decision making on a 24x7 timescale (Contact B, 2006). The
overall objective of the system is to deliver the lowest level of life cycle costs.
DS&S currently provides Engine Health Monitoring (EHM) to over 6000 engines on
ninety airlines, four air forces, and one hundred corporate operators. This value is
continuing to rise as the technology becomes more widespread within the business
environment. So far there is over 12,000 engine years experience of monitoring gas
turbine engines. Data from the complex network has enabled Rolls-Royce to become
successful in detecting a wide range of issues ranging from engine surge criteria, to
compressor deterioration resulting in increased fuel flow, and instrumental malfunctions.
Figures 10 and 11 below show the online aero-management system that is provided by
DS&S. The graphs each show up-to-date engine data trends for two Trent 700 engines
which power an Airbus A330 aircraft. Figure 10 displays changes in oil temperature while
figure 11 shows broadband vibration, both of which are monitored during the high
intensity take-off period. This data is updated automatically throughout every engine cycle
and provides Rolls-Royce with the ability to clearly monitor the engines in service. When
any inconsistencies occur or set parameters are surpassed, processes are immediately
undertaken to analyse and assess what level of action needs to be completed.
77
Figure10: DS&S data analysis for oil temperature on two Trent 700 engines
Figure 11: DS&S data analysis for broadband vibration on two Trent 700 engines
78
In recent years, Rolls-Royce has made efforts to take advantage of the secondary market
that the aero-engine industry develops. The after-market and maintenance sectors provide
the opportunity to improve revenues, protect their after-market business and therefore,
increase potential profits. For airline fleet operators TotalCare® packages are available on
most engines, with similar systems offered on military and private products, all of which
apply on a fly-by-the-hour fee. The package offers off-wing management, information and
engine health monitoring, in-service support, and inventory services (Rolls-Royce,
2006b).
The TotalCare® package is recommended as it enables the financial and technical risk to
be transferred to Rolls-Royce, who then becomes responsible for the engine support
services. It enables the customer to focus on core business areas, allows for predictive cost
levels, and also minimises operational disturbances. For these reasons many firms are now
deciding to accept these options, which can be tailored to each customer’s specific
requirements.
The drive to maximise profits further through incorporating the TotalCare® packages, has
meant that Rolls-Royce must strive to reduce issues associated with their products. A large
proportion of this has been done through product research and development. In 2005
Rolls-Royce was supported by funding from the UK Government along with personally
investing £282 million in research and development in all sectors of its business (Rolls-
Royce, 2006b). The industry requires high-technology advancements and this level of
investment highlights the desire of the firm to remain a market leader. This has enabled
higher levels of quality and reliability, and subsequently, reduced many of the associated
issues.
79
However, such advancements can only go so far in minimising the problems and costs
related with aero-engine management. Therefore, Rolls-Royce has utilised the services of
DS&S and EHM made possible through the electronic systems developed into the engine,
to aid in reducing costs yet further. As Contact B (2006) stated in the interview, “If you’re
not measuring, then you cannot analyse, and if you’re not analysing then you cannot
improve”.
With Rolls-Royce engines, 95% of all new sales have TotalCare® packages assigned to
them (Contact A, 2006). Therefore, the after-market management is now dependent upon
the firm and this subsequently can have some associated costs. However, along with the
risks present with this strategy there is vast potential for added value, which can be
correlated to the integration of the technologies provided by DS&S.
Data Analysis
A data analysis will now be completed in order to gain an understanding of the costs and
benefits to Rolls-Royce derived from the utilisation of electronics within aero-engines.
This analysis will support the qualitative knowledge that was gained through the interview
process.
Firstly, analysis highlights that an average TotalCare® package, estimated across the entire
engine fleet produced by Rolls-Royce, shows a cost value to the customer of $238 per
engine flying hour (EFH). This value is paid throughout the lifetime of the engine and
covers the majority of all associated costs. Although the value is negotiable and an
individual package can be manipulated to a customers needs, $238 per EFH represents an
accurate average.
80
The average cost is derived in a method that covers all the invoice costs and expenses of
planned shop visits that are necessary at specific stages within an engines life cycle.
Figure 12 highlights the maintenance procedures which need to be completed on the eight
core modules that are found within an engine. In order to make a clear analysis, the
characteristics of one engine and its first two shop visits can be seen.
81
F
igur
e 12
: Eng
ine
Shop
Visi
t - R
ewor
k Le
vel f
or C
ore
Engi
ne M
odul
es
Eng
ine
Shop
Vis
it - R
ewor
k L
evel
for
Cor
e E
ngin
e M
odul
es
01
02
03
04
05
06
07
08
Eng
ine
Mod
ules
L
PC
IPC
IC
H
PC/H
PT
IPT
H
S G
earb
oxL
PC C
ase
LPT
R
ewor
k L
evel
(F
irst
Sho
p V
isit)
1
2 1
3 2
1 1
1
Rew
ork
Lev
el
(Sec
ond
Shop
Vis
it)
2 3
2 3
3 2
2 2
Mod
ule
Com
pone
nt
01
Lo
w P
ress
ure
Com
pres
sor
02
In
term
edia
te P
ress
ure
Com
pres
sor
R
ewor
k L
evel
Cat
egor
y 03
In
term
edia
te C
ase
(Int
erna
l Gea
rbox
)
Leve
l 1
Visu
al In
spec
tion
04
Hig
h Pr
essu
re C
ompr
esso
r/Hig
h Pr
essu
re T
urbi
ne
Le
vel 2
C
heck
and
Rep
air
05
Inte
rmed
iate
Pre
ssur
e Tu
rbin
e
Leve
l 3
Ref
urbi
shm
ent
06
Hig
h Sp
eed
Gea
rbox
Leve
l 4
Ove
rhau
l 07
Lo
w P
ress
ure
Com
pres
sor C
ase
08
Lo
w P
ress
ure
Turb
ine
82
First Engine Shop Visit:
Stage length - 3.5hr
Cycles - 4,200
Time to first shop visit - 14,700hr
Invoice cost - $3.5 million
Approximate time on wing - 3.5yrs
Second Engine Shop Visit:
Stage length - 3.5hr
Cycles - 4,000
Time to second shop visit - 14,000hr
Invoice cost - $4.25 million
Approximate time on wing - 3yrs
Organisations that purchase new aero-engines are often classified as first tier operators.
However, after 8-10 years, these firms look to upgrade their products in order to remain in
an elite classification. Therefore, after this period the products are often re-sold to second
or third tier operators. The change in ownership results in changes to contracts so this
specific analysis focuses upon the early part of an engine’s life.
A reliable source highlights that a first engine shop visit will have an estimated invoice
cost of approximately $3.5 million. Through this process Rolls-Royce will actually incur
costs of approximately $1.75 million in the form of transportation, labour, and materials.
As a result, the firm will profit on a service of this magnitude by approximately $1.75
million. Under a TotalCare® package this profit is spread across each individual engines
83
on-wing flying hours between each shop visit. Therefore, for every hour that Rolls-Royce
can keep an engine on wing from its entry into service to the first shop visit without the
occurrence of operational issues, it is equivalent to approximately $120 profit per EFH.
When an engine requires a second shop visit the invoice cost is estimated to be around
$4.25 million. The increase in value over that of the first shop visit is present because
Rolls-Royce must take into account the greater extent of work that needs to be completed
at this stage of an engine’s lifecycle (see Figure 12). It must be noted that as a result, the
profit margin for Rolls-Royce remains around $1.75 million. Therefore, calculations show
that the value to Rolls-Royce for keeping an engine on wing throughout the time period
between the first and second shop visit is approximately $125 profit per EFH. The $5 per
EFH increase over the previous value is present to cover the increase in risk associated
with an older engine.
Rolls-Royce covers issues such as inflation and the rise in costs between engine shop
visits through a yearly escalation. These are incorporated into all TotalCare® contracts and
take into account a wide range of factors. On average, escalation stands at around 4.5%
per year. Figure 13 is an example of how the TotalCare® values may rise on a year-to-year
basis for the customer.
Figure 13: Example of yearly escalation values for TotalCare® contracts
From the cost data presented, it is clear to see that Rolls-Royce have the potential to gain a
significant advantage from incorporating this type of technology. The value gained from
Escalation Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8(4.5%) $238 $249 $260 $272 $284 $297 $310 $324
84
each engine across the entire fleet being contracted under the TotalCare® scheme is vast.
Rolls-Royce receives considerable financial reward for keeping the engines in continual
service up until the essential maintenance procedures are required. It is however, difficult
to directly correlate these beneficial changes to the improved performance of the
organisation. Rolls-Royce has continued to develop all aspects of its aero-engine division
and its current rising trend of economic success can only be attributed to all of the factors
within the system. In 2005, the civil and military sectors of the firm saw £634 million in
underlying profits. This is a rising trend which looks set to continue as a result of the high
demand for its products and services, and also the successful integration of strategic
developments within the organisation.
The main benefit to customers of a TotalCare® package is the reduction in risk. Aero-
engines are complex products that are required to work at levels of high intensity. As a
result, this can lead to problems arising which are often extremely costly. Under the
TotalCare® system, the issues that have been contractually agreed with the customer are
covered by Rolls-Royce. This shift of risk is attractive to customers, as they can continue
to concentrate on their respective core business.
On the other hand, one major benefit to Rolls-Royce is the fact that they have the value of
money. The $238 per EFH is paid on a monthly basis with usually a maximum thirty day
terms of business (Contact A, 2006). Having the constant inflow of cash enables the firm
to maximise its value. Over a large number of aero-engines, these pre-payments become
extremely advantageous. Additionally, TotalCare® packages benefit Rolls-Royce because
while the customer is paying for the services such as those provided by DS&S, the aero-
engine manufacturer is receiving the crucial data. This data is very important as it helps in
85
long-term applications such as engine development, advancement, and understanding of
operational behaviour. Rolls-Royce would want to receive this data anyway, so getting the
customer to pay is a useful strategy.
The reason that Rolls-Royce has introduced TotalCare® packages is as a result of the
FADEC engine, integration of electronics systems, and DS&S. These provide the
organisation with the ability of minimising the risk transfer which may arise within their
products and therefore maximise revenues. Before these developments this would not have
been possible as there was no process available by which a detailed ‘real-time’
understanding of the components could be developed. This therefore meant that the
associated risks were too high to enter into such strategies. The technological
advancements have therefore significantly improved the scope for the firm and the
potential to develop the business.
Within an aero-engine, there are three distinct categories of engine management. Firstly,
there is FADEC protection which covers the issues that occur instantaneously within the
engine. The second category is the on-board EHM system that automatically overcomes
in-flight issues through inbuilt technological processes. Finally, there is the EHM - Central
Services, which utilises long-term data trends along with DS&S services to establish
operational event predictions for both the engine and its related components. Although all
of these have the potential to dramatically reduce overall maintenance costs for the
organisation, it is the EHM - Central Services which is at the core of Rolls-Royce
TotalCare®.
86
The EHM - Central Services system comes under the ‘predictive’ maintenance zone and
can monitor the condition of 77% of major engine issues with the ability to detect
timescales of future operational events (Contact A, 2006). In terms of total value, this
system detects 60% of events before they actually occur. For example, in 2003 the one
specific engine type saw estimated costs of $50 million, with the ability to predict these
issues and plan ahead it enabled the firm to benefit through significantly reducing overall
costs (Contact A, 2006).
Looking at the predictive maintenance in more detail, it can be seen that new
technological advancements play an important role. For example, COMPASS, an engine
condition monitoring system accounts for 21% of detections whilst Quick TechnologyTM
developed by Oxford BioSignals (OBS) is a vibration and performance diagnostic
analyser, which contributes a further 7% (Oxford BioSignals, 2006). Even with these
developments, it must be recognised that at present there is no means of detecting 23% of
issues. In the long-term, Rolls-Royce has set their predictive maintenance targets at 90%,
made possible through increasing investment and technological development. The drive
for continual improvement can be seen with the expected introduction of the Engine
Modelling Service, develop in conjunction with Sheffield University, which will replace
COMPASS in the near future (Contact A, 2006). However, this type of improvement
process has the law of diminishing returns associated to it, so the cost of attaining greater
values is ever increasing. The firm has made clear that attaining over 95% would not be
economically viable and states that such issues need to be covered through preventative
measures (Contact B, 2006).
87
With the majority of risk under TotalCare® being transferred from the customer to Rolls-
Royce, it is important to develop a cost analysis. The facts and figures utilised in this study
are related to the benefits that the customer is potentially saving though undertaking the
TotalCare® package.
In a situation where a problem arises within an engine, the average costs incurred depend
upon the engine type and the category of disruption. A primary disruption which accounts
for issues such as in-flight shutdown (IFSD), Air Turn Back (ATB), and Aborted Take-
Off (ABTO) have average invoice costs of $140,000 associated with them. When
secondary damage is caused by an event, costs increase to an average of $267,000 per
incident (Contact A, 2006). However, if a major event were to occur then costs can be
upwards of $10 million. These relatively high costs are present because Rolls-Royce
places a mark-up value on many of their products which can be several hundred percent of
actual production costs. This inflationary process is possible due to the nature of the
business and the complex components that are required.
In a situation where TotalCare® has not been contractually agreed then the customer must
cover the majority of costs, a factor that they will obviously wish to avoid. It is as a result
of such potential risk that TotalCare® packages are so inviting and becoming more
common place within the industry.
One of the major benefits to Rolls-Royce is that when they have agreed to take
responsibility of covering operational issues, the costs they incur are vastly smaller than
those seen by the customer. The value is equivalent to cost of production as the mark-up
value is not applied ‘in-house’, so when product changes are required it ultimately makes
88
repair and overhaul costs much less expensive. However, Rolls-Royce must avoid all
issues where possible as any expense reduces their revenue and thus profitability. Also,
when any type of engine maintenance is required, Rolls-Royce also becomes vulnerable to
additional costs. These include contractual and operational penalties valued at $90,000 and
$180,000 respectively (Contact A, 2006). Such charges can significantly affect the
financial situation of Rolls-Royce so therefore it is essential that these are avoided.
Before the introduction of EHM services, any problem had to be dealt with the highest
level of caution. This meant that even the most minor of issues required either IFSD, ATB,
or ABTO and a subsequent inspection process. As presented above, there are standard
costs incurred but these can quickly spiral. Loss of airline revenue, location testing,
labour, and passenger transfers are just some extra issues which need to be dealt and can
cost an airline several million dollars. In addition, such events can severely affect a firm’s
reputation which can lead to long-term issues that are extremely difficult to overcome.
However, through the advancements made by Rolls-Royce to their products and services,
the firm has been able to massively reduce both the risks and costs seen in these areas.
Through DS&S and the EHM services, Rolls-Royce can now maximise their revenues
through predicting when failure will occur. The longer a product is in service and on-wing
then the more value they will gain. Therefore, it is essential this is achieved to the highest
level whilst remaining within set safety parameters. Also, as a result of knowing when an
engine change will be required, they can plan for the event and ensure that disruption and
cost are kept to a minimum, thus maximising the overall economic benefit for the
company.
89
The EHM and DS&S services within Rolls-Royce specifically do not focus on some of the
extreme cases, which albeit are very rare, but do cause the highest levels of impact. For
these situations the data is not present to allow for applicable and viable analysis. Due to
the lack of a data signature, there is no clear information which is able to warn of an
impeding catastrophic event. As a result, Rolls-Royce can currently do nothing in terms of
EHM to predict such issues. However, in order to overcome these non-predictable events,
Rolls-Royce continues to undertake extensive investment, research, and product
development across all departments.
The DS&S services are able to provide instant analysis of the majority of incidents that
occur within an engine. The data stream undergoes constant analysis and the personnel
involved are automatically informed of any changes so that accurate decision making can
be completed. In the majority of incidents, analysis of the received ‘real-time’ EHM data
is able to identify if an issue is serious and whether the flight can continue in service. This
is beneficial as without the technology issues would result in flight diversions along with
expensive and time consuming inspections.
Although the use of this technology by Rolls-Royce has been dominated by the civil
aerospace market, there has been integration into military products. Currently, four air
forces around the global utilise the services that DS&S can provide. Specifically, the
United States Air Force has seen vast improvements through the JetScan system. It has
been estimated that since the introduction of this service it has saved approximately $250
million (DS&S, 2006). The same system has also been incorporated into the United
Kingdom’s Royal Air Force (RAF), saving an estimated £12 million on the Tornado
aircraft since 1999. Additional cost reductions worth £84 million are expected to be seen
90
over the remaining operational life of the Tornado fleet (DS&S, 2006). This system is also
financially beneficial to Rolls-Royce as the reduction in operating issues has subsequently
resulted in the associated costs not being incurred.
Overall therefore, within the aero-engine market there have been vast benefits, especially
economic, which have been derived as a consequence of the technological advancements
and services that are now available. This has allowed accurate EHM which can help
predict when an issue gets to a stage where an engine related event is imminent, thus
maximising its on-wing life and removal at the most cost effective time.
The long-term savings which arise are extremely beneficial to Rolls-Royce. Through their
TotalCare® packages they are able to shift risk from the engine operators to themselves.
However, in reality the actual level of risk is massively reduced due to the abilities of
DS&S and the services which are now capable through the development of electronically
integrated product systems. This had greatly improved the business situation for Rolls-
Royce as they are able to maximise their economic return. Even though there will always
be risk associated with this business environment, the continued efforts of Rolls-Royce
and their desire to continue in their development, is enabling them to remain competitive
and successful.
91
Chapter 6
Discussion
92
Discussion
In order to provide a background to the aerospace, industry the trends within the civil,
military, and aero-engine sectors have been investigated. These three areas are at the core
of the industry and understanding their history along with the potential changes in the
future was vital in completing the full and detailed study.
The data highlighted a cyclical nature for the civil sector which resulted from its close
relationship with the world economy and also the demand for air travel. Alternatively, the
military division is driven by the demands of Governments across the globe as they
continue to assign expenditure funds in an attempt to protect themselves. In relation to
these, the aero-engine sector fluctuates with changes to the both military and civil
divisions, with the latter having more influence in today’s market.
The analysis also showed that although these markets have fluctuated over time, they are
currently in a period of sustained growth which is predicted by many to continue. This is
crucial for the firms operating within this environment who are now attempting to take
advantage of this beneficial time period.
The second stage of analysis that was undertaken for this investigation aimed to
understand the business environment of the aerospace industry. Initially the external
macro environment was examined using a PEST analysis and also Porter’s Diamond
model (1990) in order to improve the overall awareness and comprehension. These two
systems are currently recognised as leading models within the current literature and
therefore were chosen to be integrated into this investigation.
93
The PEST analysis looked at the Political, Economic, Social, and Technological issues
related to the aero-industry. These four categories and the interactions which develop
between them are at the core of any industry and therefore, have a strong influence upon
any organisation that operates within them. It must also be recognised that none of these
factors can be influenced by an individual firm so in order to be successful, a business
must utilise the benefits whilst also overcoming the negative issues.
The investigation highlighted that within the United Kingdom there is currently a strong
base from which the aerospace market can continue to grow and develop. Organisations
within this sector are benefiting from the advantages which are currently present. These
are driven by the importance of the sector to the national economy and the resulting
support which aims to maintain the international success which has formed. From the
analysis that was completed, it was highlighted that this trend looks set to continue within
the UK.
It was decided that Rolls-Royce would be used as a case-study, due to the ability to access
information from the company in the form of data along with anecdotal evidence from
interviews. Focusing on one firm enabled a more detailed investigation whilst providing
an insight into the industrial trends within the market.
When Porter’s Diamond model (1990) was examined to further the analysis process, the
United Kingdom was focused upon due to the integration of the Rolls-Royce case-study.
This theory, which is strongly supported in the literature, showed there was a clear
national advantage which has been present within the UK throughout the introduction and
growth of the aerospace organisations. Rolls-Royce was able to utilise this and have
94
become one of the core businesses involved within this sector, seeing success on an
international scale.
For the external industry environment, the investigation applied Porter’s Five Forces
model and also the Flagship Theory. When the Five Forces model was related to the aero-
engine sector, the market was depicted in a particularly strong position. General Electric,
Rolls-Royce, and Pratt and Whitney are the three main firms who have come to dominate
the industry, and due its nature and characteristics it looks as if they will continue to
remain in their successful positions. In addition, the Flagship Theory was shown to apply
to Rolls-Royce. They have developed a complex network of business relationships and
partnerships, of which they are at the core. They play the important role of ensuring future
success for all of those involved and have the resources and capabilities to ensure that
under their control the system continues to achieve this goal.
The overall environment for the aerospace industry and more specifically the aero-engine
sector looks from the current analysis to be in an extremely strong position. However, in
order to assess the internal environment and understand in detail the developments which
have been seen, Rolls-Royce was utilised as a case-study.
Analysis showed that Rolls-Royce has been able to remain competitive through
technological advancements which have been possible through their extensive research
and development processes and the national support which it receives. Being at the
technological frontier has allowed them to stay ahead of other organisations within the
industry and enabled them to develop products that customers demand.
95
Rolls-Royce has also made crucial strategic business decisions such as the formation of
DS&S, and later its incorporation as a wholly owned subsidiary. This has allowed the firm
to advance the products and services which it can offer its customers whilst remaining
ahead of its competitors. Examination of the data analysis in relation to the technological
advancements and strategic decisions shows the benefits that this has provided Rolls-
Royce. They have been able to introduce Engine Health Monitoring services which have
lead to TotalCare® packages being sold to customers. Although this has transferred risk
from the customer to Rolls-Royce, Rolls-Royce has been able to significantly reduce this
through DS&S systems. By integrating the new technology which has been developed it
has allowed for the development of significant advantages.
In addition, the data emphasises the degree of financial benefit that has been achieved by
Rolls-Royce through their business decisions. However, specific changes in performance
and profit to the organisation cannot be directly linked to precise technological
improvements but must be viewed as a whole. Due to this it can be stated that all of the
advancements made by Rolls-Royce have contributed the continuing financial success
which it currently achieving.
Finally, the analysis also highlights that with the continuous efforts that they are making,
the firm has the potential to progress even further. If this does occur, then in the future the
organisation has the ability to remain in its internationally competitive position whilst also
having the potential for even greater success.
96
Chapter 7
Conclusion and Further Research
97
Conclusion
For all three of the hypotheses that were developed for this investigation, it can be
concluded that all the null hypotheses can be rejected. All of the evidence that has been
collected and the analysis that has been completed indicate support for the alternative
hypotheses. Therefore:
• Data trends show potential for continued growth throughout the core sectors of the
aerospace industry.
• The business environment for the aerospace sector in the United Kingdom is
currently in a strong position and this trend looks set to continue.
• The aero-engine manufacturer, Rolls-Royce, significantly improved their overall
business when they incorporate technological advancements, with specific reference
to Data Systems and Solutions.
98
Further Research
This investigation set out to analyse the present aerospace industry environment with
specific reference to aero-engine sector. Although the study was successful in developing
a conclusion to the hypotheses that were set, there is the possibility for further research to
be undertaken.
Time and cost restraints limited the level of detailed analysis to only one firm, Rolls-
Royce. Although the information gathered provided enough information for a complete
analysis it would be extremely beneficial if this could be extended. Further studies of
Rolls-Royce and also other organisations would be able to provide a more detailed insight
into this important industrial sector and more specifically its complex internal
environment. In addition, the time scale over which the analysis was completed could be
extended past that of the 8-10 year period which was focused upon for this study.
Overall therefore, completing these suggestions for further research would be useful in
advancing the understanding developed from this investigation.
99
Chapter 8
References
100
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109
Chapter 9
Appendix
110
Appendix
Civil Turnover - European Union
Year Civil Turnover (€bn) 1980 12.71 1981 14.20 1982 14.14 1983 15.56 1984 16.57 1985 18.08 1986 22.55 1987 22.91 1988 25.42 1989 31.50 1990 33.43 1991 33.04 1992 34.32 1993 30.38 1994 27.87 1995 26.13 1996 31.25 1997 38.46 1998 41.74 1999 46.74 2000 51.88 2001 56.49 2002 51.04 2003 47.57 2004 49.63
All data courtesy of ASD (2004)
111
Military Turnover - European Union
Year Military Turnover (€bn) 1980 26.39 1981 27.44 1982 28.96 1983 28.40 1984 30.25 1985 31.86 1986 32.99 1987 34.94 1988 33.97 1989 32.66 1990 32.38 1991 29.30 1992 25.47 1993 23.01 1994 22.44 1995 22.17 1996 22.91 1997 25.00 1998 24.94 1999 21.40 2000 21.29 2001 24.09 2002 23.58 2003 26.41 2004 27.43
All data courtesy of ASD (2004)
112
Civil/Military Aerospace Turnover Percentages - European Union
Year Civil Military 1980 32.5 67.5 1981 34.1 65.9 1982 32.8 67.2 1983 35.4 64.6 1984 35.4 64.6 1985 36.2 63.8 1986 40.6 59.4 1987 39.6 60.4 1988 42.8 57.2 1989 49.1 50.9 1990 50.8 49.2 1991 53.0 47.0 1992 57.4 42.6 1993 56.9 43.1 1994 55.4 44.6 1995 54.1 45.9 1996 57.7 42.3 1997 60.6 39.4 1998 62.6 37.4 1999 68.6 31.4 2000 70.9 29.1 2001 70.1 29.9 2002 68.4 31.6 2003 64.3 35.7 2004 64.4 35.6
All data courtesy of ASD (2004)
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