Rolls-Royce Holdings is a British multinational aerospace and defense contractor based in London, United Kingdom. It was established in 2011, and its own Rolls-Royce, a company founded in 1904 known for airplane engines. The company operates in the following segments: Civil Aerospace, Power Systems, Defense, ITP Aero, and Corporate. The Civil Aerospace segment offers commercial aero engines and aftermarket services. Rolls-Royce is one of the world’s largest aircraft engines and has major businesses in the marine propulsion and energy sectors (Rolls-Royce, 2021). In addition, its defense division provides military aero engines, naval engines, submarines, and aftermarket services. Porter’s five forces model is a valuable tool to identify threats and opportunities faced by Rolls-Royce in the aerospace and defense industry.
Competitive Rivalry in the Market
The defense and aerospace industry is growing at a steady pace in the last two decades. Air travel is increasing day by day as the developing countries with population driving the growth. The main rival of Rolls–Royce is General Electric Aviation, CFM International and Pratt & Whitney. These four companies control aviation engine manufacturing. CFM has the majority share of 39%, Pratt & Whitney’s share is around 35%, and Rolls-Royce holds 12% of the market share (Statista, 2021). This competition has been increased recently to the establishment of industry in Asia. China is developing its aircraft to fulfill its need and decrease dependency on other products. The company enjoys a monopoly at the moment. Therefore, the competition in the market is increasing.
Threat of Substitutes
The growth in the aerospace and defense industry is unprecedented. The increase is because of the security threat around the world. The industry is very competitive and technologically advanced. The overall threat of substitution is low because of the higher demand for defense technology and air traveling. The industry is moving well at a time to innovate better products for the 21st century. The civil aviation industry is also growing rapidly as of 2019 (Lineberger, 2019). Rolls-Royse is ranked at the 27th number in the world defense market (Defensenews, 2020). It also a part of the top four engine manufacturers in the world (Statista, 2021). Rolls-Royce is moving toward sustainability and an efficient engine to reduce greenhouse gases. The threat level is low as long as they move with the requirement of the time.
The Threat of New Entrants
The threat of new entrance is moderate & there are many factors for it. The market is concentrated and highly competitive. According to IATA, air traveling was increasing; in 2016, there were a staggering 3.8 billion air travelers, a number it predicts will balloon to 7.2 billion passengers by 2035—a near doubling of current levels (Rosen, 2018). Second, the aerospace industry requires higher capital investment. The increase in demand will invite new companies to enter the market. Government can fund local companies to create the products, especially in Asian Region, where countries like China and India are taking steps towards self-dependency. China is pushing to develop its engine for its homemade civil planes and plans to achieve the goal by 2025 (Reuters, 2021). The companies can take away the share of the big four if backed up by authorities because demand is surging and a limited number of companies are in the market. The options available are expensive. So the threat level is at a moderate level.
Bargaining Power of Buyers
The significant buyers of defense equipment are countries around the world. The sole buyers of aviation engines are airplanes manufacturer. There are three primary producers of Airliners Airbus, Boeing, and Bombardier. Airbus and Boeing are considered industry leaders. The switching cost is high, and buyer depends upon their products. The product’s quality matters the most. Consumers have power when they are fewer in number, but there are plentiful sellers, and it’s easy for consumers to switch vis-à-vis (Martin, 2019). The market is concentrated, and both of them need each other to stay in business. These buyers provide a long-term contract. Overall bargaining power depends on the buyer, but it is moderate.
Bargaining Power of Suppliers
The supplier in this industry holds power because of the cost of integration with the company. Also, if few suppliers dominate the industry and if the industry is more concentrated than the industry it sells (Porter, 1979). The industry wants to keep working with its suppliers because of integration and the quality of the product. The raw material is directly linked with the quality of the final product. The aviation contracts usually take decades to complete. The company doesn’t want to compromise on its product. So usually, they keep the same supplier for the whole project. The cost of integration and length of a contract is a real bargaining chip for the supplier. The aerospace and defense industry uses its in-house facilities to make its products and vertically integrated. Then overall bargaining power is higher in favor of the supplier.
References
Defensenews. (2021). Top 100 for 2020. Available at: https://people.defensenews.com/top-100/
Lineberger., R (2019) 2018 global aerospace and defense industry outlook. Available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-mfg-2019-global-a-and-d-sector-outlook.pdf
Martin., M (2019) How Porter’s Five Forces Can Help Small Businesses Analyze the Competition. Available at: https://www.businessnewsdaily.com/5446-porters-five-forces.html
Porter., E. M (1979) How Competitive Forces Shape Strategy. Available at: https://hbr.org/1979/03/how-competitive-forces-shape-strategy
Reuters. (2021) China outlines push to develop domestic engine for C919 jet in five-year plan. Available at https://www.reuters.com/article/us-china-parliament-aviation-engines-idUSKBN2AX0OZ
Rolls-Royce. (2021). what we do. Available at: https://www.rolls-royce.com/about.aspx
Rosen, E. (2018) As Billions More Fly, Here’s How Aviation Could Evolve. Available at https://www.nationalgeographic.com/environment/article/air-travel-fuel-emissions-environment
Statista. (2021). Market share of the leading commercial aircraft engine manufacturers worldwide as of December 2020. Available at: https://www.statista.com/statistics/1099835/global-aircraft-engine-manufacturer-market-share/