History Of The Rolls Royce Commerce Essay

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Rolls Royce, Cobham and BAE are the three leading companies in the UKs Aerospace and Defence Industry. Rolls Royce Group has a balanced business portfolio with leading market position in Integrated Power System. Operational efficiency, cost reduction and capacity utilization have made them successful business leaders. Their core strategies are closeness to customers, providing optimum level of services and focusing on customers' requirements. Their goal is to grow their market share, install a product base, retain a future market and create high barriers to entry for potential entrants.

Rolls Royce Group recruits and retains capable people from different countries and makes heavy investment in R & D, and training and capital projects. Their acquisition of Allison Engine Company in 1995 and Joint Venture with BMW in 1999 are important strategic developments (Rolls Royce plc Annual Report 2008, pg 3-6).

Cobham Group focuses on specialist markets. The benefits from significant and sustained customer's demand lead to continuously growth opportunities. They concentrate their activities in key defence areas with government priorities, including defence electronics and national security. Cobham focuses on four enablers; Growth, Technology, Talent and Transformation. Growth encompasses focus on customers and performance management, exports and acquisition by choice. The company invests in advanced market-driven technologies. The Group attracts, recruits, retains, motivate the best talent expertise. The Transformation includes creating Strategic-Business-Units, economies of scale and excellent brand equity (Cobham plc's Annual Report and Accounts, 2008, pg 5-8).

BAE Group's key resources include personnel, relationship with customers, sub-contractors, other suppliers, research and development, and intellectual property. The resources along with application of policies and processes help to achieve its goals. The Company believes in operational performance and strategy through M & A. Good program execution helps them to improve margins and schedule adherence. The Company gives stress on exports and corporate governance. (BAE Systems Annual Report, 2008, Pg 20-21 & 67-68).

In order to explore the industry it is necessary to measure the concentration ratio within the industry. Concentration refers to the number of major competitors in a given industry (Lipczynski et. All, 2005). Concentration ratios are usually used to show the extent of market control of the largest firms in the industry and to measure the degree to which an industry is oligopolistic (Statistics, 2009). In the Aerospace and Defence industry concentration ratio is measured by the total market share of the 4 largest firms within the industry. As can be seen from Table 1, the particular industry is highly concentrated with a high degree of concentration (CR4 = 90.25%). Industries relating to this category fall often under the interest of government regulators. In the Aerospace and Defence industry, a wide variety of stakeholders are involved, including government ministers and departments, Business Enterprise and Regulatory Reform and Ministry of Defence.

The relationship between the government and the particular industry can be defined through the overall sales to the UK Government (around £4.08bn) for the year 2008 (SBAC, 2008). The strong relationship between the Aerospace industry and the UK government can also be defined through government's financial support. For example, R&D funded by the UK government was £0.6bn for the year 2008. Strong contributions the government and the particular sector reflect the high degree of concentration within the Aerospace and Defence industry.

Table 1.Concentration in Aerospace and Defence industry

Company

Sales

Market Share

Bae Systems

16671000

52.63%

Rolls - Royce

9082000

28.67%

Cobham plc

1466500

4.63%

Quinetiq

1366000

4.31%

Concentration ratio CR4

 

90.2516%

Rolls-Royce PLC is represented in civil and defence aerospace, marine, energy industries. Company's strategy is to investment in technology, infrastructure and capability developing a competitive portfolio of products and services (more than 50 current product programmes), growing global market share and installed product base, adding value for the customers through the provision of after-market services. In order to implement such strategies, the company focuses on ongoing supply chain rationalisation and the development of strategic supplier relationships, exemplified by the agreement of risk and revenue sharing partnerships.

BAE system PLC focuses on being premier global defence, security and aerospace company. Company's strategy involves grow through the provision of through-life capability in partnership with the armed forces in the local markets. Strategic actions are to establish in the UK sustainable profitable through life businesses in Air, Land and Sea; growth of EI&S business both organically and through mergers and acquisitions; to implement a home market strategy to grow in the Kingdom of Saudi Arabia; to implement global land systems strategy; to implement global initiatives in Security, Readiness & Sustainment (R&S) and Unmanned Aircraft Systems (UAS).

There have been financial scandals and redundancies in the major aerospace companies worldwide. The companies faced problems mainly due to the global recession resulting in major redundancies. For example, British Aerospace announced redundancies in 2009. The number of the people who have been made redundant in 2009 is 2300 (Steele, 2009). Rolls Royce has also announced redundancies of more than 2000 workers (Sky News, 2008). Similarly, Cobham has announced shedding off of more than a hundred workers (Northern Scot, 2010). Meggitt another major aerospace player also announced redundancies of more than 700 workers in 2009. In overall, there has been bad news in the particular sector as far as the redundancies concerned. The problem is mainly due to the lower demand for products and services since the world grappled with recession resulting in a slowdown in companies' activities.

There have also been financial scandals off late. For instance, BAE has been in the midst of a bribery scandal concerning its sales in Saudi Arabia. In 2005, the company accused for a 60 million pounds slush fund which bribed the Saudi officials with exotic holidays and glitzy cars (Little, 2006). In return, the Saudi officials awarded them large contracts but the case is still under investigation. Another investigation deals with the radar system sales to Tanzania. It has been alleged that BAE paid off ministers in Tanzania for buying its radar systems. Furthermore, there has been a Hindu Scandal in which BAE accused of bribing top Indian personnel for fixing 1 billion dollars arms deal with India (Corporate Watch, 2010).

The Aerospace and defence industry has high barriers to entry for newcomers. There are several factors that can be identified as potential entry barriers such as government support, research and development, economy of scale and customer loyalty/strong brand.

Traditionally, the aerospace and defence industry has direct relationship with government because of its strategic importance. The government tries to support the particular industry by high level of defence expenditures. As a result, governmental support affects industrial concentration and creates high barriers to entry.

Moreover, sustained and regular investment in R&D creates high barriers to entry, especially in highly concentrated industries. For example: "Rolls-Royce continues to invest in core technologies, product, human resources and capabilities in order to broaden and strengthen the product portfolio, improve efficiency and enhance the environmental performance of its products" (Rolls-Royce annual report, 2009). Such investments deter potential entrants.

Economy of scale also can be barrier for potential entrants. Leading and experienced firms of the aerospace and defence industry enjoy lower production costs than inexperienced newcomers because of rare resources and high technological capability requirements. Therefore, gained reputation of leading companies within the industry creates customer loyalty and strong brands. Of course, a reputation takes time to build and this time requirement acts as an important deterrent for potential entrants to the aerospace industry.

To sum up, UK's Aerospace and Defence industry consist of a small number of companies. The three leading companies within the industry are Rolls Royce, BAE Systems and Cobham. These companies develop their strategies through R & D, training and capital projects, M&A for continuously growth. Gained reputation, governmental support, sustained investments on R&D and lower production costs create high entry barriers for potential entrants. There have been financial scandals and redundancies in the major aerospace and defence industries and many cases are still under investigation.

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