So let's look at the influences on
Rolls-Royce arising from the application of Porter's Five Forces model.
Remember, what we're trying to do is establish the state of
competitive rivalry in the industry in which Rolls-Royce operates.
What we'll see here are some of the influences,
not necessary being exhaustive list,
certainly not an exclusive list, it's non exclusive.
Let's start with the threat of new entrants.
Well if you think about it,
designing and manufacturing airplane engines aero design,
it's challenging, it's difficult, it's costly.
The barriers to entry are actually high.
There's the specialized nature,
advance nature of design.
Research and development costs a fortune.
Customer confidence is really important after all,
if you're sitting on an airplane and you look out the window,
you want to have some degree of assurance that,
that plane isn't going to stop working or indeed drop off,
that will lead to market reputation brand.
And to make sure that happens there's needs to be
extensive testing for the safety of engines and that in itself is very costly.
Barriers to entry are really high.
If we think about substitutes,
well actually for an airplane engine itself at present at least,
in the future that might change who knows, the present,
there's no real substitute on an airplane for an aero engine.
And the threat of substitutes particularly in the context of
global travel threats substitute for air transport are very low.
Of course it may well be that
some business travel is reduced because organizations and their staff are
finding new ways of using e-communication in particular to
not have to do those face-to-face, person-to-person meetings.
Also, in some geographical locations,
if you think about China,
if you think about linking the U.K. to continental Europe, the height,
the growth of high speed train travel will clearly have
an impact upon air travel itself and that may have an impact upon the design,
manufacture, and sale of airplane engines.
Having said that, there seems to be not just a growth in high-speed train travel,
but there seems to be an almost incessantly increasing demand for air travel.
Think about the bargaining power of buyers,
well I guess the reality is there are low numbers of
potential buyers of new aircraft because there's a finite number of airline companies.
In that context, what that means is that the buyers of
aircraft engines are essentially price makers not price takers.
As price makers, they can have a great deal of
influence on driving down the market price for new engines,
and indeed the power of buyers has increased in
recent years as many airlines have become global carriers.
And if we think about the bargaining power of suppliers,
well in this industry,
suppliers have very limited power.
There are a large number of very small suppliers and being small as is the norm,
doesn't equate with power.
Engine manufacturers themselves have been quite innovative in their approach to
sourcing strategies with a number of them not just having one single sourcing strategy,
but adopting dual or even more sourcing strategies
and that limits supply power still further.
Having said that, there are some suppliers who do have
a degree of influence and a more a relatively more powerful,
and that's because they're involved in the supply of high-specification,
electronic-controlled equipment,
absolutely essential to the functioning of a good effective engine.
Dr Alan ParkinsonDeputy Director (Education), School of Management
