Rolls Royce Case Study Analysis Requirements
Rolls Royce is a successful international company that provides power systems for aircraft, ships and land applications. From being a company close to bankruptcy in the 1960s it has grown to have a global footprint and now provides aero engines for some of the most advanced passenger jets like the Airbus A380 and the Boeing 787.
The attached case provides a narrative on the fortunes of the company over the last 50 years or so.
The assignment asks you to:
1. Consider where you would situate the Rolls Royce operation on the Hayes and Wheelwright model of operations contribution (discussed on p. 44 of the textbook) in the 1960’s and now – discuss the differences?
2. Evaluate the main markets of Rolls Royce (new engines, ‘power by the hour’ and in-service remote engine monitoring); what are the order winners and order qualifiers in these markets? P. 54 of the textbook should provide some insights into this. An answer in table format – as shown on P. 55 is acceptable, provided there is some description to accompany it.
3. Make some recommendations for the operations strategy of Rolls Royce to consider in the future. What does the company need to do to ensure that the market requirements and organizational capabilities remain aligned?
Please note:
• Limit your analysis to 3 pages. The page count includes all analysis and recommendations, graphs, tables and references.
• As a formatting guideline for doc or PDF files use: Font Arial 12 pt. 1 inch margins on all four sides, A4 pages
• Cover pages, etc. are not required.
• Be analytical, succinct and thoughtful in your response; simply restating the contents of the case will not give you a good grade.
Case Study
Rolls Royce
HIGH above the Pacific, passengers sleep on a long flight from Dubai to Boston. Suddenly a bolt of lightning strikes the plane. Those startled by the flash and bang soon settle back into their seats, but on the other side of the world, in Derby, engineers at Rolls Royce are busy.
Lightning strikes on passenger jets are common—a couple every hour—and almost always harmless, but this one has caused a hiccup in one of the engines. The aircraft will land safely, however the question is whether it will need a full engine inspection in Boston. That would be normal, but it would delay the return journey and keep hundreds of passengers waiting in the departure lounge.
A torrent of data is being analysed from the aircraft in Derby by technicians. Before the plane lands, word comes that the engine is running smoothly. The aircraft can take off on time.
Rolls-Royce’s global operations room in Derby, with 24-hour news channels, banks of computer screens and clocks showing the time around the world, looks like a currency-trading floor. It seems far away from the manufacturing that Derby has pioneered since the dawn of the industrial revolution, but this facility is the heart of a vast industrial empire.
Over the past couple of decades or so Rolls- Royce has transformed itself from a loss making British firm into the world’s second- biggest maker of large jet engines. In doing so, it has deliberately blurred the lines between manufacturing and services.
Export engine
The striking thing about Rolls-Royce, however, has been its success in foreign markets. Its revenues, about 85% of which come from abroad, have almost doubled in the decade since Sir John Rose took over as chief executive. About half of the latest wide-bodied passenger jets and a quarter of single-aisle aircraft rolling off the production lines these days are powered by its engines.
An understanding of the firm’s success requires some understanding of the technology that goes into its civil-aircraft engines. This is not just Rolls- Royce’s biggest business, it is also the one that both killed the company in 1971 and proved to be its salvation two decades later.
The best place to start is the surprisingly small, almost underwhelming, turbine blades that make up the heart of the giant engines slung beneath the wings of the world’s biggest planes. These are not the huge fan blades you see when boarding, but are buried deep in the engines. Each turbine blade can fit in the hand like an oversized steak knife. At first glance it may not seem much more difficult to make, yet they cost over $10,000 each. Rolls-Royce’s executives like to point out that their big engines with a mass of almost six tonnes are worth their weight in silver. As a comparison, the average car is worth its weight in hamburger.
Turbine blades are difficult to make because they have to survive high temperatures and huge stresses. The air inside big jet engines reaches about 1,600°C in places, 400 degrees hotter than the melting point of the metal from which the turbine blades are made. Each blade is grown from a single crystal of alloy for strength and then coated with tough ceramics. A network of tiny air holes then creates a thin blanket of cool air that stops it from melting.
Making the blades is merely the entry ticket to the market. Both of Rolls Royce’s main rivals have also mastered the art. In such a competitive field an incremental advance by one manufacturer is usually matched by the others within a couple of years. A recent study found that over about 40 years each of the three leading engine-makers has in turn taken a technological lead, but none has held it for much more than a decade.
Rolls-Royce’s triumph was not to build a slightly better engine and thus earn a temporary technological edge, but to design a completely different one. Remarkably, it did so from a position of weakness. Until the late 1960s the market for big jet engines was dominated by Pratt & Whitney. Rolls-Royce played a bit part, making engines mainly for European aircraft manufacturers. These were losing, bit by bit, to America’s biggest aircraft-makers, which had the benefit of a much larger domestic market and substantial military orders. Rolls-Royce realised that unless it could develop a large jet engine that would fit an American-made airliner, its sales of jet engines would collapse within a decade.
It bet everything on two revolutionary technologies. The first was to use carbon composites to make the fan blades (the big ones you do see) far lighter than the metal ones of the time. The second was to change the basic architecture of jet engines by using three shafts instead of two. Both tasks turned out to be harder and costlier than Rolls-Royce thought. Its composite blades shattered when hit by hail or birds. Eventually it had to abandon them for the tried and tested metal ones. And by then an embarrassing series of delays and missed performance targets had caused it to run out of cash. A Conservative government nationalised the company in 1971.
Although the new design broke Rolls-Royce, it also proved to be the base for a whole family of winning engines. These were more complex to design, build and maintain than those of rivals, but they also used fuel more efficiently and suffered less wear and tear. Much more importantly, they could be scaled up or down to fit bigger or smaller aircraft. As a result, Rolls- Royce did not have to design a new engine from scratch each time a new airliner came onto the market, allowing it to compete for sales across a far wider range of aircraft than its rivals. This was a huge advantage because the main determinant of whether a jet engine sells well is whether the aircraft it is married to sells well. Rolls-Royce can sell across the board. It is the only one of the three main engine-makers with designs to fit the three newest airliners under development, the Boeing 787 Dreamliner, the Airbus A380 and the new wide-bodied version of the Airbus A350. Of the world’s 50 leading airlines, 45 use its engines.
The big pay-off from getting engines under more wings comes from selling spares and servicing them. This is because selling aircraft engines is like selling razors. The razor and engine make little if any profit; that comes later, from blades or spare parts and servicing (see chart 3). Gross margins from rebuilding engines are thought to be about 35%; analysts at Credit Suisse, an investment bank, estimate that some makers of jet engines get about seven times as much revenue from servicing and selling spare parts as they do from selling engines. Many analysts suspect that Rolls-Royce (and others) sell engines at a loss. Judging this is hard, though, because of the way Rolls-Royce accounts for long-term contracts, often by booking a profit on the sale for income that will be received only over many years. Rolls- Royce says that, on average, engines are sold at a profit.
A cut-throat business
The trouble with selling razors at a loss is that someone else may make the blades to fit them. And the juicy margins in engine maintenance have indeed attracted a swarm of independent servicing firms (and engine-makers after each other’s business). Rudolph Hirdes, an aircraft-maintenance expert at
Aviation Consultancy Holland, reckons certified spare parts for big jet engines can be had for one-third of the price charged by the original manufacturers.
This is where Rolls-Royce has melded its technology with service to make it more difficult for competitors to pinch its business. Rather than simply giving away razors to sell razor blades it has, if you will, offered to shave its clients every morning. Instead of selling airlines first engines and then parts and service, Rolls-Royce has convinced its customers to pay a fee for every hour that an engine runs. Rolls-Royce in turn promises to maintain it and replace it if it breaks down. “They aren’t selling engines, they are selling hot air out the back of an engine,” says an investment analyst. The idea is not unique to Rolls-Royce; the other big makers of aircraft engines do much the same. But Rolls-Royce has adopted it with greater gusto. It has been offering the service for more than a decade; more than half of its engines in service are covered by such contracts, as are about 80% of those it is now selling.
Make it, sell it, service it
This may seem to support the theory that Britain would do better to concentrate on supplying services rather than on making things. Yet it shows instead that it is sometimes necessary to be good at making things to sell the services connected with them. At Rolls-Royce it is difficult to see where one begins and the other ends.
The operations room in Derby, for instance, continuously assesses the performance of 3,500 jet engines around the world, raising an almost insurmountable barrier to any rival that hopes to grab the work of servicing them. The data collected can be invaluable to airlines: it enables Rolls- Royce to predict when engines are more likely to fail, letting customers schedule engine changes efficiently. That means fewer emergency repairs and fewer unhappy passengers. The data are equally valuable to Rolls-Royce. Spotting problems early helps it to design and build more reliable engines or to modify existing ones. The resulting evolution of its engines has steadily improved fuel efficiency and over the past 30 years has extended the operating life of engines tenfold (to about ten years between major rebuilds). “You could only get closer to the customer by being on the plane,” says Mike Terrett, the company’s chief operating officer.
A further reason for its success is its wholehearted embrace of globalisation. Whereas British car firms once contented themselves with making shoddy cars for the domestic market, Rolls-Royce has transformed itself from a British firm into a global one. About 40% of employees work in countries other than Britain, compared with 7% two decades ago. About half its new engine projects are based abroad, along with the same proportion of its research and development. A side benefit is that it sets factories in different parts of the world in competition with one another for new projects, something carmakers have done for years to keep down labour costs.
Rolls-Royce can also draw on the strengths of local economies where it opens for business; those economies in turn adapt to the company’s needs. It attracts suppliers and other related industries. In Derby, wages are above the national average. So are grades in local schools for subjects such as maths and science, prerequisites for good jobs at Rolls-Royce and the firms that surround it.
As much as Rolls-Royce’s embrace of globalisation is both a cause and effect of its success, it also raises uncomfortable questions over the future of manufacturing in Britain. For there is much to suggest that, barring some fundamental changes at home, the shift abroad will continue to gather pace.
One reason for this is the lure of subsidies and other incentives from foreign governments. Britain has been no slouch at handing out taxpayers’ money: in 2001 it lent £250m to Rolls-Royce to help develop bigger jet engines; in 2006 it agreed to give grants of £47m to a group led by Rolls-Royce to design an environmentally friendly engine. But others have been far more generous. When Rolls- Royce opened a facility in Germany recently it may have been influenced by a pledge from the state of Brandenburg to cover 30% of its capital costs. Similarly an estimated $57m in assistance from state and local governments may have helped it decide to build a factory in Virginia. “We courted Rolls-Royce for five to six years,” says Liz Povar of the Virginia Economic Development Partnership, which is funded by the state.
Furthermore, British executives continue to lament the country’s educational standards and complain that many universities disdain collaboration with industry. Although things are improving, others often appear keener. In Virginia, part of the offer to Rolls-Royce was for state investment in education at all levels in order to help provide a skilled workforce.
And as manufacturing employment has declined in Britain, there has been less reason for the best and brightest to study the subjects that manufacturing demands. Rolls-Royce executives say that the pool of experienced engineers, process managers and skilled workers from which the company can recruit is shrinking. Many of these people used to come from carmakers or other industrial firms. But a once-steady flow is now a trickle.
Sir John believes that Britain needs an economic “route map” to encourage investment in manufacturing. One suggestion he makes is to ensure that local firms share in the construction of new nuclear plants—something that would, no doubt, benefit Rolls-Royce. Sir John insists that this is not special pleading for his company. He has a point: it is big enough to go where it pleases.
Such proposals would have fallen on deaf ears just a few years ago. Yet now, with the finance industry in tatters, politicians on all sides in Britain are talking enthusiastically of manufacturing strategies and the limitations of leaving industry to the whim of market forces. A government that just three years ago allowed the collapse of Rover, the last British-owned mass-market carmaker, is now seriously contemplating a bail-out of Jaguar and Land Rover, sold to Tata, an Indian conglomerate, almost a year ago.
Most believers in free markets take issue with governments which grant subsidies to attract (or keep) factories, insist that contracts be reserved for local firms or otherwise try to tilt the economy towards favoured activities. That goes for industries of all sorts, from bashing metal to banking. Light- touch financial regulation may prove to have distorted the economy. And the government has argued that the competitiveness of financial services is enhanced by tax breaks for people living in Britain but domiciled abroad (half of whom work in that industry).
There is no need to make a fetish of manufacturing, even when finance is in such bad odour. Industrial economies such as Germany are suffering too. But the success of Rolls-Royce suggests that the world will not be neatly divided into firms (or countries) that make things and those that sell services. Flying high depends on being able to do both.
Solution
Rolls-Royce Holdings plc – Case Analysis
Rolls-Royce has achieved significant growth and development since the 1960s. As the Company continues to record significant success in its operations, it has expanded through numerous subsidiaries. Its designs, products, and distribution power systems targeting the aviation, automotive and other industries have acquired a broad market share, making the company the second-biggest manufacturer of large jet engines and other products. Additionally, the company’s expansion and the success in foreign markets has enhanced its profit efficiency and returns. However, the Company experienced great challenges in the 1960s that drove it almost to bankruptcy. In accordance with the Hayes and Wheelwright model of operations contribution, it was internally neutral (in Stage I), with numerous challenges that needed to be addressed to increase its operational efficiency and competitiveness. The implementation of effective strategies was key for the development of the Company. Decades later, Rolls-Royce has achieved significant success, which makes it an externally supportive company (in Stage IV of the model).
In the 1960s different factors held the company back, making it difficult for the exploration of the domestic and foreign markets. It was losing its competitive edge within the market, recording constantly declining market share, decreasing profitability and decreasing strategic impact. Additionally, the Company experienced significance difficulty in production, in the penetration of the market and in its development. The need for the adoption of a new and an efficient corporate strategy was undeniable. Decades later, the Company has achieved immense success in all its areas of operation. The application of new strategies, the implementation of new product development, market penetration and development strategies has given the Company a competitive advantage making it an efficient competitor in the market. Today, Rolls-Royce Holdings plc is not only as good as its competitors but has grown to become one of the best companies in the industry. The Company has a corporate strategy that is articulately linked with its operations and has implemented driving strategies that give it operations advantage over many of the competitors in the industry.
The implementation of an efficient strategy was key for the development of the Company and the improvement of its competitiveness in the industry. However, the identification of the issues that limited its operational efficiency and success was an essential step towards the development of such strategy. A keen analysis of the case reveals that the company did not invest sufficiently in new technologies, innovation, and in research and development. As such, the return to profitability after the declining sales and a struggling period in the 1960s can be attributed to the change of corporate strategy and efficient leadership and management (Stevenson, 2012). Failure to implement new technologies almost led to the bankruptcy of the Rolls-Royce in the past. However, the change of strategy through investment in technological advancement and application in production and operations within the Company has played a significant role in its development. The incorporation of new technologies in the manufacturing products, the development of an efficient design and product development team, and extensive research and development to ensure quality production gave the Company a competitive advantage over its competitors. To distinguish itself from the rest, the Company concentrated on the construction of completely different products.
The Rolls-Royce operations strategy aligns with the market requirement and the operations resources and thus has made it possible for the Company to retain its customers while attracting new ones. Its market share has grown considerably over the years. The Company has differentiated its products and services and aligned them with the market need thus consistently expanding its market. Its market includes the Airbus A330, Airbus A380, Boeing 777, and Boeing 787 Dreamliner, and Airbus A350 among other key players in the aviation industry and other industries (Rolls-Royce, 2016). Moreover, its order winners include complex but efficient designs that use fuel more efficiently and suffer les wear and tear compared to the competitor’s designs. Additionally, other order winners include customer-aligned services and the pay-per-hour services, whose market as well include the aforementioned and new customers. On the other hand, order qualifiers for the Company include the blades, spares and the services it offers following their sale.
Recommendations
The Rolls-Royce Holdings plc should consider and implement different strategies for the continued improvement of its market share. The most significant element of the element should be directed towards ensuring the continued alignment of the market requirements and organizational capabilities. The Company can achieve this through the efficient integration of technologies in its operational processes, the development of its design team, and the consideration of the market needs. Additionally, focus on improving on the development of its corporate strategy, mainly on the issue of servicing which ensures that the Company is constantly aware of the market is critical for the maintenance and improvement of the alignment of the requirements of the market with the capabilities of the organization. Moreover, the Company should integrate innovation in all the processes. Doing so will enhance its production processes and improve its sales, market share, and profitability.
Bibliography
Rolls-Royce. (2016, January 20). Markets . Retrieved from Rolls-Royce: http://www.rolls-royce.com/country-sites/singapore/markets.aspx#civil-aerospace
Wheeler, J. C. (2010). Rolls Royce. New York: ABDO Publishing Company.