Introduction

Rolls-Royce plc is one of the largest manufacturers of large marine turbines and defence equipment. It operates in more than 50 countries and employs over 54,500 people worldwide (see Appendix A). Rolls Royce plc’s main markets include aerospace (49%), energy (23%), defence (21%), and others (see Appendix B). Rolls Royce plc is a United Kingdom-based international engineering and manufacturing firm, which has its name after the most famous product developed by it, the Rolls-Royce car. It also runs a business of providing services in aerospace propulsion systems, marine power systems, defence electronics as well as energy solutions.

The firm was formed by Charles Stewart Rolls in the year 1904 after he met Henry Royce, who ran a small motor-car manufacturing business called ‘Royce Ltd’ at that time. Charles provided financial support to this venture so that the partnership between himself and Henry could be consolidated into a single entity named “Rolls Royce Limited”. They sold their first engine produced under their collaboration in 1906 & thereafter, other models gradually followed thereafter, thus marking the formal start of this legendary British brand manufactured automobiles (Mezzanotte, 2004). The company is now a public company listed on the London Stock Exchange incorporated in 2011.

The company’s vision is to be an automotive and aerospace leader, creating the best value through the discovery and application of new technologies. Rolls Royce plc aims to deliver best in class products, services & solutions that deliver superior performance with lower environmental impact. Rolls Royce plc attracts talented people from around the world to develop innovative technology that makes its products stand out from the rest of the available alternatives so that they maintain a leadership position within the global market for many years ahead. Furthermore, Rolls Royce is striving hard towards building a ‘Greener Planet’ through the development of innovative technology which will promote energy efficiency, thus reducing emissions related carbon footprint created during the production process.

Rolls Royce plc is a global company with a presence in over 50 countries and is one of the most advanced manufacturers in its field. It aims to build a sustainable, profitable business that respects social, economic as well as environmental outcomes for itself, its employees, customers, and stakeholders. The objectives of this company as mentioned in its Annual Report are: To be the global name in aerospace and defence technologies; To be best at everything we do, by investing in the right technologies and services to meet customer expectations around the globe; To offer world-class products, services and solutions that deliver superior performance with lower environmental impact, through investment in R&D.

Assessing the external environment in terms of factors that affect the company in its national and international markets: most important for Rolls Royce plc are intellectual property rights, environmental issues, competition law, and labour laws in the countries it intends to expand business activities. For each country market, a separate assessment about all the factors is needed:

Total Available Market (TAM) must be assessed on a global basis as well as in specific country markets that Rolls Royce plc plans to go into; it is also important whether other competitors might enter this market/country. Economic growth across the globe will increase the demand for travel and energy. Forecasts predict a 4.5% annual growth rate in the target markets of Rolls Royce over the next 20 years (see Appendix C).

Any major change in the market demand for Rolls Royce’s products and services that might have an impact on its profitability need to be assessed. Recent trends in the markets show growing demand for clean power, electrification, and digitalisation. The company needs to adapt to the changing demand in the market.

In political terms, however, Rolls Royce plc needs to be very active, as most of the business is derived from high value and strategic contracts that can be impacted by government interventions (Marijs and Hulleman, 2019). Laws relating to technology transfers and capital investments affect the ability to enter international contracts. So, it is important to keep track of what policy changes happen anywhere in the world and how they may affect the company’s business activities.

Rolls Royce plc is also interested in tracking any economic fluctuations that might affect its financial performance. Currency exchange rates fluctuations could bring substantial benefits or losses to the company from time to time depending on whether the price for contracts is agreed in sterling or euros/US dollars, Interest rates changes may help or hinder growth, and large input cost impact can affect the profitability. Keeping all these factors constantly under review helps enable a proactive approach when dealing with problems.

 

Task One

Rolls Royce operates in a competitive industry. Rolls Royce operates in multiple markets like automobile, aerospace, defence, and engineering. Rolls Royce plc utilises its financial strength and technical superiority to build long term customer relationships and expand its operations globally.

The competition for Rolls Royce plc can be assessed through Porter’s Five Forces model:

Threat of Substitutes

The threat of substitutes is low because there are no other products that can perform an equivalent function as jets and gas turbines which are very expensive to manufacture and difficult to maintain (Porter, 1980, p. 51). It is hard for any competitor to substitute them or create something similar that performs just as good or better than existing products. Thus, there is a favourable environment for Rolls Royce Plc. There aren’t any substitutes available, so it makes this threat low but not insignificant since people may still turn away from jet engines towards more sustainable alternatives such as electric cars, making way for future entrants into this market.

Bargaining Power of Buyers

The demand for jets and gas turbines is mostly controlled by airlines which are global players. The demand for these products is inelastic because airlines operate many different routes, will do anything to cut costs and most importantly, need high-quality engines that perform efficiently. Few other industries require this kind of technology, so even though demand is inelastic, there are enough buyers who value quality. The demand is stable as there will always be buyers who want aerospace technology, whether commercial or defence industry because every nation wants to remain ahead due to security reasons. Rolls-Royce’s success across every sector of its business is down to an unrivalled partnership network built up over decades within key global markets, military entities, and support operations.

Bargaining Power of Suppliers

Suppliers within the industry have low bargaining power as well due to there being only one or two contractors making a specific type of engine, meaning that there can only ever be 2 bidders per contract resulting in Rolls Royce PLC having greater power over its suppliers (Porter, 1980, p. 57). At this point, Rolls Royce plc can dictate terms on its suppliers because it’s a seller’s market due to high demand compared towards supply in the aerospace industry, where they procure major parts from lower-tier suppliers.

Threat from New Entrants

Dealing with threats of new entrants is a matter which many companies can deal with by having good quality standards, cutting costs meant to stay competitive in the industry. For example, Rolls Royce has adopted a strategy of avoiding some low margin businesses where other competitors like Boeing Co. (BA) compete and shed businesses that don’t fit their core competencies; for example, their environmental services arm was sold off to Veolia. Rolls Royce plc works in the aerospace and defence sector, where multiple companies provide services to the customers. But Rolls Royce is more popular than others because of its technological superiority. Moreover, most of its competitors are smaller than Rolls Royce, so they cannot match up with Rolls Royce’s standards or quality.

Industry Rivalry

Industry rivalry in terms of competition in the global aerospace & defence industry is high due to rapid changes, and it’s no surprise that companies are forced to adapt quickly like Rolls Royce, who manages their business accordingly. This means an enhanced focus on efficiency, cost control and operational performance while also taking advantage of areas such as Intellectual property, product development, innovation, and investment (Guy, 2009). Also, periodically reviewing the company’s risk management approach, accepting appropriate levels of exposure according to the nature of their assets and capabilities is necessary to ensure survival. Defence companies like BAE Systems, Boeing Company and Raytheon are constantly competing to capture customers from Rolls Royce. There are three main competitors in the airline’s industry, Boeing Company of the USA, GE Aircraft Systems and Pratt & Whitney engine manufacturer based in Hartford, USA. These companies have been established for more than five decades dominating the world market by having exclusive contracts with many airlines around the globe. Due to increasing competition not only by these players but also from other local companies. Rolls Royce maintains its competitive advantage in cutting edge technologies and expertise in several aligned industries (see Appendix D).

 

Task Two

A stakeholder is any individual or organisation that can affect or be affected by the achievement of a company’s objectives and its activities. The most famous theory relating to stakeholders is the stakeholder theory, proposed by R. Edward Freeman in 1984. It views stakeholders as ‘those individuals or groups who have a direct and legitimate interest in the success of an organisation’.

The idea of stakeholders was developed to show that organisations have a wider impact than just their owners (Friedman and Miles, 2006). Various interest groups can be considered stakeholders of a company; they may be affected by decisions made by management in different ways and to different extents. It is important for managers to take into account those activities that affect stakeholders greatly when making decisions about the company’s future direction. For Rolls Royce, the main stakeholders are the following:

Shareholders who hold shares in Rolls Royce receive dividends from the profit made.

Shareholders: The shareholders are the owners of the company. These shareholders invest their money into the company on faith that it will make them (and thus their investment) a financial gain (Freeman, 2010). They are interested in maximising profits, and thus they demand that management uses all available resources to maximise profits. The shareholders can be divided into two groups: those who have a significant stake in the company, such as institutions who own more than 15% of the share capital and those who have very little stake such that they cannot directly influence the decisions of the company.

Government: UK Government, which encourages growth in research and development and manufacturing jobs. Rolls Royce plc is a strategically important company with control over defence and sophisticated technologies (Lim, 2021). The company is a multinational company with operations in the UK, France, Germany, the USA, and China.

Buyers: Customers are another important stakeholder as they provide the demand and revenue that makes it possible for the firm to operate and succeed. Without customers, there would be no business activities and hence no income or profit for the organisation. For Rolls Royce, major aircraft and military equipment manufacturers are the dominant buyers.

Suppliers: Suppliers provide goods and services to companies in exchange for payment. Suppliers can be classified into two groups: direct suppliers who sell directly to the company and indirect suppliers who sell goods via other channels such as contractors. Indirect suppliers do not receive any payments from Rolls Royce, but their sales are dependent on Rolls Royce’s demand for goods or services. Rolls Royce paid £10.1bn to external suppliers in 2018 (see Appendix E).

Employees: The employees are a key stakeholder of the firm as they are responsible for carrying out the day-to-day activities of the business. Rolls Royce engages highly skilled employees and is dependent on their expertise for its high-tech operations. Thus, it is important that employees’ interests and concerns are taken into consideration when making management decisions. Rolls Royce spent £27.1m on training and development in 2018 (see Appendix E).

Society: Society is another important stakeholder when it comes to all kinds of support, such as government support or environmental issues, which are important to the organisation.

Suppliers of capital: Suppliers of capital are those who provide money to the firm, like banks and investment funds. They expect a reward such as interest on their investment. Rolls Royce must pay them on time and in full so that they will be willing to continue providing money when required by the company.

Any changes in profitability or cash flow can affect stakeholder interest and requires that management exercise control over these factors. We can develop a Power-Interest Matrix for different stakeholders of the company (Ackermann and Eden, 2013).

 

The interests of different stakeholders may not always align and maybe at crossroads at times. While it is in the interest of the shareholders that the company engage in more deals for its defence business with buyers from different countries, but the UK government may restrict dealing with some countries in the national interest. While the company is interested in getting the best deal at the lowest prices, the management needs to consider the sustainability of dependent subcontractors for long term interests. The interests of minority shareholders are often different from shareholders with controlling stakes. The needs of different stakeholders should be managed and taken care of.

 

Task Three

The UK operates under a mixed economy system. This is based on key components of the market economy: private ownership, free markets, voluntary exchange and competition. On the other hand, there are also elements of government involvement in regulation, subsidies, and employment.

The UK economy has capitalistic features because factors of production (land, labour, and capital) are privately owned by individuals or companies. The government regulates the conditions under which these businesses operate but does not own them. Free market economies let things happen without interference from the government (though governments still do try to legislate against monopoly). Private individuals and companies then seek out whatever best suits their own interest (maximising profits), making use of all available resources, including labour-power but generally ignoring wider social consequences like pollution or unemployment effects on communities far away from where they operate their companies. This makes them efficient in terms of how much output can be produced with given inputs but often leads to inequalities within different parts of society.

Government has policies designed to counter inequality if it gets too high such as progressive taxation. Inequality is also decreased by benefits paid out according to need rather than ability. This includes child benefits paid where children live, pensions paid according to age, disability benefits to people who cannot work, and other forms of support available if you need them. The government has introduced laws to support labour welfare, such as trade unions to negotiate wages between employees and employers, laws relating to working hours, minimum wages, unemployment pay. This is called social democracy or welfare state because it supports living standards at an acceptable level for most people under capitalism. There are both advantages and disadvantages of the mixed economy system.

A mixed economy provides stability to the nation; it ensures economic stability by maintaining economic growth, stemming inflation, and reducing the unemployment rate (Roll, 1984). It helps to achieve economic progress by encouraging entrepreneurship and investment in the business sector. Moreover, it encourages free trade between nations which increases international trade and thus benefits all those involved in such activities. It also gives the opportunity to develop new technologies which further enhance productivity in the industry. In addition, a mixed economy allows equal opportunity for all individuals to compete with their counterparts from other countries without any form of discrimination. Lastly, it ensures social justice through the provision of social security programs like health care insurance schemes, unemployment insurance schemes etc., to people who are unable to get such facilities from private sector firms /organisations.

But there are a few problems in the system too. A mixed economy may encourage the concentration of ownership, leading to unhealthy monopoly and oligopoly situations in different sectors (Stucke and Ezrachi, 2020). Moreover, it gives rise to inequalities among different firms and organisations, which in turn leads to conflict between them. This further implies that a mixed economy can lead to unethical practices like price-fixing, rigging of market conditions, non-transparency in business dealings etc. As a result, it threatens economic stability as well as disrupts the national economy (Offner, 2019). Lastly, it does not promote social justice because social security programs are only for those who can afford them and cannot be availed by poor people who are unable to pay for such schemes.

To ensure social welfare in free markets, the UK government follows many macroeconomic policies, including managing the interest rates. The purpose of this is to manage inflation in the economy.

Inflation can impact Rolls Royce plc’s profitability through the effect that it has on its costs. Rolls Royce plc is highly exposed to fluctuations in commodity prices, which are affected by inflation. In addition, inflation can lead to a change in the value of money, which affects the nominal price of Rolls Royce plc’s products and contracts. These factors can increase costs for Rolls Royce plc and inhibit its profits. Additionally, an increase in interest rates also impacts the money supply and, therefore, economic growth. Higher interest rates encourage people to save more money, therefore reducing spending and economic growth. This can reduce demand for Rolls Royce’s products, thereby reducing its revenue.

Rolls Royce plc is interested in the maintenance of a competitive economy as it wants to be able to compete against other businesses both home and abroad. This will help prevent international competitors from taking away any of its market shares or affecting profit margins negatively. Therefore, macroeconomic stability and competitiveness are both important objectives for Rolls Royce that can be impacted by the actions of the government.