BMAN71471 Innovation Management

Professor Bruce Tether

Assignment A: Rolls-Royce core competences and innovation strategy

Number of words: 2000

Denis Lopes - 8151427

IM Assignment A MSc IME 2011-12 Denis Lopes - ID: 8151427 BIG ACHIEVEMENT As keenly put by Economist(2009) article, Rolls-Royce revival is praiseworthy Over the past couple of decades or so Rolls-Royce has transformed itself from a loss-making British firm into the worlds second-biggest maker of large jet engines. In doing so, it has deliberately blurred the lines between making things and offering services. It is interesting to reflect how Roll-Royce was able to turn a dark fate of bankruptcy and nationalisation in early 1970s into a success of 2000s. Particularly, by analysing the core competences and strategy that lead them to todays success and, more important, ponder if these elements can turn into core rigidities or blind spots in the future. SUCCESS ORIGINS There are 3 key events, in the last 3 decades, on Roll-Royce (RR) business and Technology trajectory: 1. Development completion of RB211-22 engine. The engine which development bankrupted RR, but later on proved being the seed for the successful platform of engines Trent (RR, 2004). 2. After 1996, the new CEO of RR put strong emphasis in after-sales service, expanding original concept of Power-by-the-hour created in 1980 (BCG, 2009) to include not only maintenance costs, but purchase costs as well. 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 (Economist, 2009). 3. Acquisitions at 1990s: RR acquired the engine manufacturer Allison in 1994 and the marine business Vickers in 1999. These open the door for a diversification path of RR in the future, with acquisitions of Low-carbon technologies: Tidal in 2009 and Fuel Cells in 2007 (RR, 2011). Roll-Royce has a product and technology path around high-performance powering systems. It started in 1906 manufacturing cars and followed by aircraft engines for military and civil applications, submarine nuclear reactors, gas turbines for power generation, and lately marine engines. This technological path allowed RR to develop some key capabilities that today compose their core competences. CORE COMPETENCES Prahalad and Hamel (1990) define core competencies as the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies. In, Prahalad and Hamel (1994), conditions are: To be considered as a core competence, a skill must meet three tests (customer value, competitor differentiation, and extendibility). Capabilities
1) Manufacturing of safe critical-high performance parts

Core Competence
1) High-performance highly integrated safety-critical systems 2) Services: Performance-based contract

Products
Aircraft Engines Gas Turbines Nuclear Reactors Marine engines

- Material expertise - Precision manufacturing - Process expertise - Strict quality control (grain casting) 2) Design expertise - Complex and integrated systems
(many subsystems with different technologies. Performance and safety depends on optimization of whole system) Engineering knowledge: Aero and Thermo dynamics, Combustion systems, Heat transfer, Noise & Vibration

3) Certification- Approval process for Regulated Product 4) Testing 5) Monitoring Systems

IM Assignment A MSc IME 2011-12 Denis Lopes - ID: 8151427 STRATEGY Rolls-Royce corporate strategy is based on 5 key elements (RR, 2012): Address 4 global Markets: Power systems for civil and defence aerospace, marine and energy markets. Invest in Technology Infrastructure and Capability Develop a Competitive Portfolio of Products and Services Grow Market Share and our Installed Product Base Add Value for Customers through the Provision of Product-Related Services From Whittingtons (2001) model of perspectives of strategy and Teeces et al(1997) paradigm models, Rolls-Royce seems to favor Classical perspective with a strategic conflict approach. This might be explained by its environment of few competitors, long developments, and high barriers to entry (capital intensive, complex product & relatively fixed customer base). Some key mechanisms used by RR to acquire and retain competitive advantage are noteworthy: Differentiate by: Offering Novelty: not only by technology leadership on new products (fuel efficient engines like open rotor project), but also on new Business Model (service-based contracts) Mastering Complex systems: high technology, highly integrated and safe-critical system (engines, nuclear reactors). Grow by: Lowering end-customer purchase barriers through service contracts: no capital investment, reduced risk and predictability. Profit from: Focus on High-performance product/services markets: where profit margins could be larger, since customers are less price sensitive when the value proposition is distinctive. Platform design to capture a broader segment of the market, through small variations on the product with minimum new development costs. Long term contracts of services provide financial predictability. Defend by: Reliance on barriers for new entrants. Relatively difficult to imitate time and cost effectively. Monitoring of competitors and scanning of new technologies Definitely it is a strong strategy, but one could argue about its adaptability to a fast changing environment, particularly considering architectural innovations (Henderson and Clark, 1990) and substitute threats coming from disruptive technologies (Christensen: 1997, Christensen et al 2004). According to Dynamic capabilities perspective (Teece et al:1997, Prahalad and Hamel:1990) it is how company adapt its capabilities and competences to better respond to a changing environment that will create a sustainable competitive advantage. Winners in the global marketplace have been firms that can demonstrate timely responsiveness and rapid and flexible product innovation, coupled with the management capability to effectively coordinate and redeploy internal and external competences. (Teece et al,1997) In the short run, a company's competitiveness derives from the price/performance attributes of current products. In the long run, competitiveness derives from the ability to build, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products.. (Prahalad and Hamel,1990).

IM Assignment A MSc IME 2011-12 Denis Lopes - ID: 8151427 THE FLIP SIDE The recipe for success that brought RR to todays success might not be the same for futures success. The core competences if not adapted according to the environment might turn into core rigidities (Leonard-Barton, 1992). Despite the huge returns accrued by RR when it regained control of the after-sales market, it is important to ponder for how long this competitive advantage will last. In RR the main market, civil engines for widebody, aircraft manufacturers usually design the aircraft to be able to use end-customers preferred engine supplier. The engine, in this perspective, turns into a module of the aircraft system that can be configured as desired. Once the 3 major suppliers (RR, GE, P&W) could offer similar value proposition (price, performance, efficiency, reliability & support ) for their engines, the overall proposition could start be seen as a commodity where customers just decide based on price of flight hour and funding support. Neither the aircraft manufacturer, nor airlines have much focus on it after the buy decision is made. From the engine manufacturer perspective makes sense selling the engine with almost no profit, based on prospective profit of selling service later on. This strategy of performance-based contracting is similar to razor-razorblade strategy. It helps catching a large share of the market in the short run. Nonetheless, it is important to analyse in the long run what are the consequences on differentiation and downstream value, introduced by this change in strategy. One could argue that the differentiation would still lies on quality of service, and since this is embedded in people and processes (capabilities) that are hard to imitate. Nevertheless, some important elements of sustaining a competitive advantage might be changed, such as switching costs and customer power (now based on price of powering service). Airlines nowadays do not need to invest on training and spare parts. In the future, a new aircraft purchase might offer them a chance of choosing a different engine supplier based on the moments offer. For this strategy of service-based value to succeed, on this environment of strong competitors, it depends on at least keeping up with technology of competitors. This requires constant surveillance of competitors strategy and scanning of new technologies. The technology which aircraft engines are based now has reached its plateau phase. It is hard to come up with a product that provides differentiation. Even when a company manage to come up with a incremental innovation, this competitive advantage will not last long (Economist, 2009) due the nature of technology. Without major investments, to search and try an architectural (new components integration) or a radical innovation (new power system), only incremental innovation can be economically reached. Architectural or Radical innovations can shift the balance of competitive forces (Porter,1980) very fast and sometimes with long lasting results (Henderson and Clark:1990, Christensen:1997, Tushman and Anderson:1986). Nevertheless, to aim for these type of innovation has it is a risky strategy, but if successful, the consequences could be almost lethal to its competitors for high technology markets (Arthur,1996). The last time RR aimed for an architectural innovation (3-shaft configuration and carbon-fibber blades) the bumps along the road brought them to their knees. Without government nationalization in 1971 that could have been the end. Nonetheless, the competences (technologies and skills) acquired with this development proved vital to technological success of RR. THE FUTURE A large share of RR profits come from civil aerospace market (RR,2012). There has been some strategic move to balance the product portfolio and diversify by acquisitions on low-carbon energy technologies. Nonetheless, the main stream of future developments of RR is composed by 3 main projects on civil aerospace market: 1) Advance2 (a two-shaft engine targeted at single-aisle market); 2) Advance3 (a more fuel efficient engine based on existing architecture for widebody) and 3) Open rotor: a propfan engine (external blades) aimed at achieving an architectural innovation with 30% more fuel efficient .. a clear manifestation of the Rolls-Royce belief in the relentless pursuit of new technology, is targeted for entry into service in the next decade.{2025} Shah, RR Sales Director.

IM Assignment A MSc IME 2011-12 Denis Lopes - ID: 8151427 If this strategy is followed through, probably by 2020 experts will be calling Open rotor project either a clear example of Architectural innovation or, lets hope not, an example of Core Rigidities. It got all the elements of a good architectural innovation: a good reason based on main customers requirements (fuel efficiency in a rising fuel cost scenario seems to be right approach) and a promise of considerable performance improvement (30%) without dealing with competence destroying technology. Nevertheless, these reasons might not guarantee a successful result (Christensen: 1997, Christensen et al 2004). Even considering RR can navigate through technical challenges imposed by this architectural change (noise issues and customer perception of safety), still exist doubts about how the business and technological environment will be when this long project is finished. If the rules of the game do not change too fast, especially during the game, RR will be in a good position. Apart from competitors moves, threats of substitute competition might not be underestimated. RR strategy is based on following assumptions: - Fossil fuel will rise steadily, but within limits - No unlikely events that could affect perception of safety of civil aviation - Required infrastructure will be available - No substitute threat reach equivalent price/performance level A spike in oil price might increase attractive of competitive services. A committee (ACARE, 2010) assembled by aviation industry evaluated that the High-speed train is not a threat substitute for airplanes. Definitely it will not replace the airplanes, but the share of transportation market could be rebalanced. On short routes (around 500km) between big cities train is already a considerable competitor, especially in Europe. This could be seen as an opportunity as well. High-speed train is starting to be seen as more ecologic friendly and safer than other types of transportation. Mag-lev trains, a promise of disruptive technology, are still expensive, but history shows that technology can evolve very fast, especially on electrical-electronic systems (telephone, semiconductors in Christensen et al, 2004). GE might be better positioned in capabilities terms, trains and superconductors technology (GE, 2011), if this scenario shows up. By using this strategy, GE is turning possibly competence destroying (Tushman and Anderson ,1986) technology into competence enhancing technology. RollsRoyce has an opportunity, at its backyard, of striking a joint-venture deal with struggling train division of Bombardier in UK (FT,2011) and start developing a power systems for trains. In summary, the best strategy seems more related with comparative, than absolute risks. The real source of competitive advantage lies on finding the right capabilities to develop to fit this future world.

IM Assignment A MSc IME 2011-12 Denis Lopes - ID: 8151427

REFERENCES
Prahalad C.K. and Hamel G. (1990), The core competence of the corporation, Harvard Business Review, May-June, 79-91. Teece D., Pisano G., and Shuen A. (1997), Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18, 7, 509-534. Christensen, Clay (1997), The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, HBS Press, Harvard. Christensen, C., Anthony, S. and Roth, E (2004) Seeing Whats Next: Using the Theories of Innovation to Predict Industry Change. Harvard Business School Press Hamel G. and Prahalad C.K. (1994). Competing for the Future. Harvard Business School Press. Boston, Massachusetts. Leonard-Barton, D. A. "Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development." Strategic Management Journal 13 (summer 1992): 111-125. Tushman M. and Anderson P. (1986), Technological Discontinuities and Organisational Environments, Administrative Science Quarterly, 31, 439-465. Arthur, W.B. (1996) Increasing Returns and the New World of Business, HBR Whittington, R. (2001) What is Strategy and Does it Matter?, (2nd ed.). London: Thomson Learning. Porter, M. E. (1980). Competitive Strategy. Free Press, New York. Economist (2009). Rolls-Royce: Britain's lonely high-flier. Available at http://www.economist.com/node/12887368 [accessed on 28/12/2011]

Shah, K (2011) Fly into the Future, Rolls-Royce plc. Available at

www.afraa.org/index.php/component/docman/doc_download/197-fly-into-the-future

[accessed on 28/12/2011]

FT(2011) Bombardier loses out to Siemens on train order. Available at http://www.ft.com/intl/cms/s/0/e2b22262-9802-11e0-85e9-00144feab49a.html#axzz1jGG32DL2[accessed on 05/01/2012] Rolls-Royce (2004). Three-shaft Technology. Web Archive. Available at http://web.archive.org/web/20061016141514/http://www.rollsroyce.com/civil_aerospace/technology/threeshaft.jsp [accessed on 28/12/2011] Rolls-Royce (2012). Rolls-Royce Corporate Strategy. Available at http://www.rollsroyce.com/about/group_overview/strategy/index.jsp [accessed on 05/01/2012] ACARE (2010). Beyond Vision 2020 (Towards 2050). Advisory Council for Europe Aeronautics and Air Transport Available at www.acare4europe.org/docs/Towards2050.pdf [accessed on 28/12/2011] Owen, J.M. (2000) Developments in aeroengines, Department of Mechanical Engineering University of Bath, UK Aviation Today (2006) Rolls-Royce Engine Support. Available at http://www.aviationtoday.com/am/categories/bga/345.html [accessed on 29/12/2011]

IM Assignment A MSc IME 2011-12 Denis Lopes - ID: 8151427

Flightglobal (2011). Engine Directory. Available at http://www.flightglobal.com/directory/searchresults.aspx?navigationItemId=382&manufacturerType=Engine&se archMode=manufacturer&Keyword=&Manufacturer=3082 [accessed on 05/01/2012] Boomblerg (2010), Rolls's New CEO May Face Engineer Glut as Jet Projects Dry Up, Available at http://www.bloomberg.com/news/2010-09-30/rolls-royce-s-new-ceo-may-face-engineer-glut-as-jetliner-projects-dry-up.html [accessed on 29/12/2011] Rolls-Royce (2007). Rolls-Royce grows global fuel cells capability with US acquisition Available at http://www.rolls-royce.com/energy/news/2007/rr_grows_global_fuel_cells.jsp [accessed on 05/01/2012] Rolls-Royce (2011). Rolls-Royce - Low carbon technology. Available at http://www.rollsroyce.com/technology_innovation/low_carbon_tech/ [accessed on 29/12/2011] BCG(2009) Thriving under adversity: Strategies for growth in the crisis and beyond Available at www.bcg.com/documents/file15490.pdf [accessed on 29/12/2011] GE(2011). GE Innovation. Available at http://www.ge.com/thegeshow/ [accessed on 18/01/2012]