Page 5: Porter’s Five Forces model
One way in which staff within Rolls- Royce have focused their actions for responding to the changing role of the business, has been to use Porter’s ‘Five Forces’ model of industry competition. Five Forces analysis gives an improved understanding of the degree of competition within the business environment. It has helped them to develop a better understanding of the business environment so that business opportunities could be analysed. The model identifies one force within the industry – competitive rivalry - as well as four forces outside the industry:
- potential entrants and the threat of entrants
- power of buyers
- power of suppliers
- threat of substitutes
As described above three dominant players operate in this oligopolistic global industry. The industry is capital intensive and there is a requirement for high investment in advanced technology and research and development. No single manufacturer dominates the industry, so balance fuels the rivalry.
Competition in the primary market for aero-engines is intensified by the link to the secondary market for engine part sales and services. Access to the secondary market is dependent on achieving the original sale of new engines. In recent years the intensity of competition has increased as each manufacturer has tried to improve its volumes and market share. Rivalry has also intensified because gas turbine engines are now essentially a mature product and the potential for technological differential advantage has been reduced.
Power of buyers
The numbers of potential buyers of new aircraft are low. Buyers of aircraft engines are therefore essentially price makers, with the market price for new engines being largely set by the buyer. The power of buyers has further increased in recent years as many airlines have become ‘global carriers’.
The decision to purchase a particular aircraft or engine combination is a long-term one. This means that failure to secure an order may prevent an engine manufacturer trading with a particular airline for more than a decade. The selection of one engine type can lead to a domino effect, with other competing buyers following the same selection. Airlines are increasingly seeking lifetime cost of ownership guarantees, and reduced repair costs.
Power of suppliers
The suppliers to the aero-engine manufacturer have limited power. There are many hundreds of different suppliers to the aero-engine industry. They supply all nature of components, from nuts and bolts to state-of-the-art electronic control systems costing hundreds of thousands of pounds. The power of many of the smaller companies, which represent most of the supplier base, has been reduced. This is due to engine manufacturers adopting dual sourcing strategies, using a range of alternative sources of supply. The most powerful suppliers are those involved in the supply of high specification electronic control equipment.
Threat of entry
Although not unknown, entry to the aero-engine industry is extremely difficult. The highly specialised advanced nature of aero-engine design combined with the costs of research and development as well as the confidence of customers represent significant barriers to entry. New engines also need extensive testing before gaining airworthiness approval from the authorities. The market is also sensitive to the reputation of the engine manufacturer, where names such as Rolls-Royce represent a range of proven high-technology products.
Threat of substitutes
There is no substitute for an aero engine and the threat of substitutes for air transport itself is minor. However, it is thought that the development of video conferencing capability will reduce some business travel and the growth of high speed train travel (e.g. Eurostar) will affect some travel decisions. However, both of these developments are taking place at a time when the demand for air travel is increasing.
This analysis shows that the commercial aero-engine business is highly competitive, with the buyer possessing and exerting a very powerful influence upon organisations. The high barriers to entry and the low threat of substitutes indicate that existing competitors will continue to share the business between them. However, a slow down in industry growth and the increasing maturity of products will intensify the degree of rivalry between the engine manufacturers.