Three companies; GE Aviation, Rolls Royce and Pratt & Whitney have long dominated the aircraft engine Industry. This essay discusses the need to manage the global business environment in order to establish and maintain a competitive advantage, and subsequently ensuring the businesses success. Through examining the strategies of Rolls Royce and GE Aviation we can determine the different methods of globalizing manufacturing and production. This examination if executed through the theoretical framework of Dunning’s OLI model, the new trade theory, the international product cycles and managing global value chains.
Synopsis Three companies; GE Aviation, Rolls Royce and Pratt & Whitney have long dominated the aircraft engine Industry. This essay discusses the need to manage the global business environment in order to establish and maintain a competitive advantage, and subsequently ensuring the businesses success. Through examining the strategies of Rolls Royce and GE Aviation we can determine the different methods of globalizing manufacturing and production.
This examination if executed through the theoretical framework of Dunning’s OLI model, the new trade theory, the international product cycles and managing global value chains. Aircraft Engine Industry: GE Aviation & Rolls Royce Aircraft Engine Industry: GE Aviation & Rolls Royce Introduction It’s been nearly 104 years since an American company manufactured the first airplane. Since then many firms have developed innovative products to enhance the aircraft engine industry.
In an industry with a promising future, with a sales growth rate of 8. 96% it begs the question as to why more firms aren’t invested in the future of aircraft.
The answer could be that existing power firms such as GE Aviation, Rolls Royce and Pratt & Whitney have established firm entry barriers to potential competitors, or their prevailing competitive advantages withstand. Firms such as GE Aviation and Rolls Royce specifically strive to establish and maintain competitive advantages in a volatile global environment.
This essay will argue that a firm’s entry strategy can be determined through examining Dunning’s OLI model, the new trade theory, the international product life cycle and the global value chains; and subsequently result in establishing and maintaining a competitive advantage that is equivalent to produce greater value to consumers under the changing patterns of competition in the global market. Dunning’s OLI Model A company’s competitive advantage is detrimental to succeeding in both existing and new markets.
A competitive advantage can be translated in the form of many different elements. Specifically the application of the OLI model can help understand both Rolls Royce and GE’s process of internalization. Majority of both company’s production and manufacturing is undertaken overseas. Both GE Aviation and Rolls Royce have conducted several joint ventures as an entry mode into foreign markets. The OLI model can service an understanding in determining the factors of this mode of entry and the influences the decision entails.
Ownership advantages, Location –specific advantages and internalization are the three elements of Dunning’s Eclectic theory (Dunning, 1998). In a technological industry that advances rapidly companies technological superiority is difficult to maintain. The aircraft engine industry has empirically shown that a firm’s competitive advantage from an incremental advance is hard to sustain with no firm keeping advantage for more than a decade. Firms can acquire a competitive advantage through product differentiate; Rolls Royce did this successfully through its design of new fan blades for the engine.
Although this produced high research and development costs for the firm it constructed a strong competitive advantage in the industry. This product differentiation created unique products, and simultaneously formed an ownership advantage that would need to be considered when entering into new foreign markets. The easily adaptable engines designed by Rolls Royce enabled them to achieve a wider market, with its engines being the only ones to fit in the newest airliners.
The engine Rolls Royce developed was a form of standardization of production and manufacturing, with the design of the engine specifically easy to manipulate the size of engine to fit different aircrafts. This subsequently assisted Rolls Royce to establish economies of scale, and hence gain a competitive advantage. The ownership advantages involved with Rolls Royce and GE electric pertain to the exclusive control over production and outlets, as well as team specific production skills. Both GE electric and Rolls Royce have established a firm reputation of excellence and expertise in the aircraft engine industry.
Many joint ventures have taken place to protect this reputation, for example the Engine Alliance between GE Aviation and Pratt and Whitney is a 50/50 arrangement allowing both firms to collaborate their R&D and concentrate efforts on engines for Airbus A380. There are definitive location advantages when it comes to the production of aircraft engines. Many firms take advantage of factor endowments that different countries offer. The foreign government subsidiaries have enticed many of RR and GE firms to set up operations overseas.
The externalities that derive from location specific advantages can be used to a firms benefit. Different countries have specific advantages to them in regards to economics, political and social. Economically in December 2012 GE Aviation announced the acquisition of Italy’s AVIO manufacturing company to strengthen its global supply chain capabilities (Business Wire, 2012). This $4. 3 billion U. S investment will provide a profitable long-term revenue source for GE Electric as well as allow production and infrastructure to prosper under the parent company.
Politically the British government has historically been very involved with Rolls Royce, through it being nationalized by the government in 1971 in a bid to rescue the firm from financial issue, only to be de-nationalized two years later. However the government’s interest in the company did not stop there, in 2001 British incentives of manufacturing was received in the sum of ? 250 million to Rolls Royce for research and development. This was however no match to other countries such as Germany and America whose financial investments in RR encouraged a very enticing location advantage that the lead to them establishing subsidiaries.
The different advantages associated with Dunning’s OLI theory explain why GE Aviation and RR entered into foreign markets, as it is these advantages that produce a competitive advantage and allow the firms to sell their engines at a competitive price. New Trade Theory The new trade theory developed by Krugman seeks to explain the linkages between location specific advantages and industry characteristics that enable trade between similar countries. The new trade theory encompasses the increasing returns of scale, First mover advantages and the global strategic rivalry.
Rolls Royce and GE Aviation both had to try and sustain a competitive edge in the aircraft industry, however this was increasingly difficult at the beginning due to 90% of the market share dominated by Pratt & Whitney. In theory the first mover advantage allows pioneer’s of an industry to reap the benefits associated with being an industry first. However it was Rolls Royce manipulation of the late mover advantages that has seen the companies’ sales increase exponentially.
Late mover advantages include changes in technology, free-rider effect, incumbent inertia and information spillovers (Phatak, 2009). Both GE Aviation and Rolls Royce overcame the first mover advantages through the alliances they formed and knowledge they shared with their joint ventures and strategic alliances. Both Rolls Royce and GE Aviation stem from parent companies that had immense experience in the manufacturing industry already. The new trade theory educates firms on how to enter into a market competitively, and subsequently sustain a competitive advantage.
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